From the way that a key executive board member of the International Association of Insurance Supervisors (IAIS) and the Basel Committee of Banking Supervision views globally systemic risk, it appears that some insurers are considered to be systemically risky in a very broad sense of the term.
In remarks at the NAIC international forum in Washington last week and in remarks to a reporter, it is clear Paul Sharma, executive director of policy and deputy head of the U.K.’s Prudential Regulation Authority (PRA), believes he sees facets in the giant prism of economic risk that many do not see or mention in general public discussions.
First, most regulators, let alone insurers, are not privy to both banking and insurance confidential financials, which are much more extensive than what is available publicly.
The world’s banking regulators cannot peer into the confidential insurance metrics of global systemically important insurers (G-SIIs) candidates nor can the IAIS look at any confidential bank metrics.
But, as a pan-sector financial regulator, who also chairs a Financial Stability Board (FSB) working group, Sharma is one of the few, as he acknowledges, who can see both the financial metrics of both banks and insurers, but because they are confidential, he cannot share what he knows.
He made it clear, though, that the rest of the financial sector, industry and regulators, are not seeing the whole picture, and that there is more systemic risk to be discussed when and if everyone can access the same metrics. A lot of the disconnect in the debate of insurers’ versus banks’ systemic risk, he suggested, was coming from people having access to only subsets of data, Sharma said at the NAIC forum on May 10.
For example, he noted afterwards, most cannot see the gross notional values of derivatives as end users of derivatives or see gross as net, according to Sharma.
Some global insurers have argued that banks carry much more gross derivative exposure than insurers, on average.
But even when an insurance company risk is in nontraditional insurance, it can look quite differently than banks participating in the same arena, Sharma said, who was once a specialist insurance regulator.
Also, Sharma explained in the forum, and afterward, concerns with competitive trading questions and imbalances that could cause systemic risk if a bank is systemically important but an insurer is not. He used the example of a derivatives trader that is a subsidiary of an insurance group competing with the derivatives trader of a systemically important banking group. This imbalance in competitiveness “is potentially made worse if we just designate banking groups and not just insurance groups,” he said.
The imbalance, he explained in a chat afterward, could exacerbate the credit cycle, and make things more volatile.
Practices that are strongly encouraged in calm times and strongly discouraged in other times also tend to be systemically risky, Sharma said.
There are some forms of asset transformation, of gaps between promises made on one hand in the insurer’s sale of long-term investment products and those taken on the other, that you would not even see in the banking center, he said in the public forum.
Sharma chairs the IAIS’s Financial Stability Committee, the influential committee that will choose the potential G-SIIs for review by the G-20‘s Financial Stability Board (FSB). As such, he is one of the key people detailed to the final list of G-SII candidates. A final determination of the first crop of G-SIIs may come next month, a delay from April.
The committee is vice-chaired by the NAIC’s Elise Liebers. Over at FSB, Federal Reserve Governor Daniel Tarullo is now chairman of the FSB’s standing committee on supervisory and regulatory cooperation (SRC), acting as a sort of traffic controller for the G-SII candidate list once it enters FSB airspace, among other things.
The “list” has been the subject of much debate internally and externally.
In April, the PRA became responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms — around 1,700 financial firms total.
Sharma debated other panelists who all argued, by turns, that their company, or in the case of Swiss Re, their industry – reinsurance – is not systemically risky, that the state -based insurance system works, that they believe in group-wide supervision and that they do now know what it will be like to be a G-SII if they are designated one, but they do not think any positive will outweigh the negatives.
Swiss Re has been “spotlighted” as a potential G-SII, said Swiss Re chief economist Kurt Karl at the session.
The state-based system has worked very well, asserted Gen Re’s General Counsel Damon Vocke. There has been no contagious event within the insurance company regimes and the NAIC is always improving system with enhancements, Vocke said.
With international companies, “we believe supervisory colleges are a prudent and appropriate vehicle. We have had two to face, another one coming up. All our regulators are invited. It is a very robust and comprehensive discussion. It is a “terrific way to do top-down analysis,” Vocke said. “There is no historical evidence that insurers, on their own pose, systemic risk.” He added that he does not think parent Berkshire Hathaway is on the G-SII candidate list.
But, most companies and sector regulators can only see a slice of metrics in the public domain driving insurance risk, Sharma suggested in his remarks.
When and if the banking and insurance complete financial metrics are in the public domain, you will be able to see much more clearly the comparability of risk, Sharma told the audience of state regulators, federal officials and industry executives and lobbyists.
With more disclosure, we will be able to have a more coherent, public debate on this, Sharma said on the panel devoted to addressing financial stability in the insurance sector.
Later, he said there are many nondisclosed financial data that are confidential but suggested these metrics matter, even though they are not seen as material to be reported publicly by the insurance company.