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G-SIIs named; list includes big U.S. insurers

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The G-20′s Financial Stability Board designated an initial group of Global Systemically Important Insurers (G-SIIs) today.

The insurers are: Allianz SE American International Group, Inc., Assicurazioni Generali S.p.A., Aviva plc, Axa S.A., MetLife, Inc., Ping An Insurance (Group) Company of China, Ltd., Prudential Financial Inc. in the U.S. and Britain’s Prudential plc.

The nine insurers designated by the FSB will be subject to a host of rules if their countries adopt the measures. For instance they will be subject to higher capital amount requirements, higher quality capital requirements, potential corporate restructurings, potential divisions of business and restrictions on business, and orderly plans for the effective resolvability of their companies if they were to fail.

Today the International Association of Insurance Supervisors (IAIS) also released proposed final G-SII policy measures, assessment methodology for determining them, as well as a report on macro-prudential policy and surveillance in insurance.

These G-SIIs will be required to hold regulatory capital for all group activities. The development of backstop capital requirements will be finalized by September 2014 and the requirements will apply shortly thereafter. 

Starting in 2019, G-SIIs must have a higher loss absorption (HLA) capacity for conducting their nontraditional and non-insurance activities (NT, NI). These activities are very broadly defined, roping in a large swathe of life insurance activities.

By the end of 2015, the IAIS will develop the implementation details for HLA that will apply to designated G-SIIs. The IAIS based its initial recommendations on methodology using 2011 data.

The activities that might make an insurer a G-SII can vary greatly from one insurer to another, but are generally related to their NTNI activities and any interconnectedness generated from those activities, the IAIS stated.

The two most important factors for assessing the systemic importance of insurers are NTNI activities and the degree of interconnectedness, according to the IAIS.

NTNI activities are important because, among other matters, the longer timeframe over which insurance liabilities can normally be managed may not be present. 

What constitutes NTNI has been a point of concern with insurers, though. Some argue, for example, that what is nontraditional – such as variable annuities – really is traditional, at least in the United States.

The life insurance industry and the Geneva Association have argued vociferously against their inclusion as NT. In fact, almost all voices in the industry in public G-SII forums have been critical of the methodology and of the G-SII policy, arguing that insurance is not systemically risky, and creating the framework will make insurers more risky and bank-like, and less focused on long-term liabilities, as intended. 

According to the IAIS documents released today, there are many examples of NT or NI, or both, including variable annuities, products with guaranteed minimum death and withdrawal benefits, guaranteed investment contracts (GICs), which are used by all variable annuity writers to hedge risk, synthetic GICs and products that provide credit guarantees to financial products such as securities, mortgages and other traded or non-traded instruments will be considered NTNI by the IAIS.

NTNI life insurance products with non-traditional features and different types of financial guarantees may heighten a firm’s exposure to financial market risk and the underwriting of credit insurance, and reinsurance contracts with modified risk transfer that can materially affect the risk profile of contracts.

Insurance policies or products that expose the insurer to substantial market and liquidity risk will be considered NTNI. These are generally products that require a more complex risk management practice to hedge and likely require sophisticated use of derivatives, according to the IAIS.

Some NI activities include asset management, proprietary trading, synthetic investment structures and the underwriting of credit default swaps, “which go beyond the traditional scope of insurance,” the IAIS stated.

The G-SII picks are much more f a life insurance event than a property casualty event. “The potential for systemic risk arise only from non-traditional or non-insurance activities. And IAIS stated that traditional property and casualty activities do not give rise to systemic risk,” noted David Snyder,Property Casualty Insurers Association of America’s (PCI) vice president, international policy.

G-SIIs are determined to be a risk to financial stability because their scope, the nature of their business and their position in the financial system is such that their distress or failure might cause disruption to the wider financial system and the real economy, according to the IAIS. 

One big question that remains is just how the separate organizations’ capital standards will be coordinated globally and domestically. There are the enhanced capital standards and enhanced prudential regulation required for domestic insurance systemically important financial institutions (SIFIs) due from the Federal Reserve, the Basel III minimum capital, liquidity and leverage standards also due later from the Federal Reserve for these SIFIs and for insurers with thrifts, and now the G-SII capital standards, if applied, for some of these insurers. 

“Our expectation is that the FSB will rely on regulators in the United States to implement G-SII policy measures for U.S.-headquartered companies,” said U.S.-based Prudential in a statement this afternoon. “Prudential will remain engaged at both the global and domestic level on developing regulatory standards that are beneficial to consumers and preserve competition within the insurance industry.” 

MetLife stated, “We are reviewing the proposed policy measures for G-SIIs, which were just released today.” Earlier in the week it protested being in Stage 3 of a review for a possible domestic systemically important financial institution designation.

Another question is how the Financial Stability Oversight Council (FSOC) will approach these international standards and how the Federal Reserve Board will develop requirements for U.S. insurers. FSB has no legal authority, nor does the IAIS, to impose requirements.

The FSB leaves it up to each country to determine how they would implement the FSB recommendations.  For the U.S., under the Dodd-Frank Act, the FSOC has the authority to impose consolidated supervision on a G-SII, by designating the company for Federal Reserve supervision and enhanced prudential standards, a treasury spokesperson noted.

FSOC in June designated AIG and Prudential as a SIFIs, although Prudential has requested a hearing to protest it, and MetLife is now, against its wishes, being reviewed for SIFI status.  Congress has already pulled in U.S. insurance supervisory representatives to grill them and ferret out what the coordinated U.S./state approach will be. The Federal Insurance Office (FIO) at Treasury and Treasury, SEC and Federal Reserve Board have been involved in either the IAIS and FSB process because of their leadership and membership roles at the organizations.

PCI did express concern about this potential game-changer for the industry.

“Before the policy measures are imposed on the few designated G-SIIs, we urge a careful re-evaluation of the systemic risk issue in the context of U.S. developments to ensure that the benefits of any additional regulation far exceed their costs and that good companies are not harmed,” Snyder said. PCI said it supports the interest among members of Congress for representatives of the U.S. engaged in international regulatory issues to coordinate closely for the benefit of the industry.

The NAIC voiced its displeasure in a release this afternoon.

“Despite having the largest number of G-SIIs within our jurisdictions, U.S. state insurance regulators have little insight into the deliberations at the FSB, so it is unclear whether other information beyond the IAIS work was considered,” stated Connecticut Insurance Commissioner and IAIS member Tom Leonardi.
While mitigating systemic risk is an objective all financial regulators share, he said, it is important to get it right, and the NAIC is not sure that the IAIS has.
“The IAIS agreed on a quantitative methodology which produces a relative ranking of firms based on metrics thought to be relevant for determining systemic importance. However, in our view, the analysis conducted to date by the IAIS is not sufficient by itself to draw the conclusion that any or all of the firms on the list are GSIIs,” Leonardi stated.
By July of 2014, the IAIS will provide the FSB with a recommendation on the G-SII status of, and appropriate risk mitigating measures for, major reinsurers. This may be the reason Berkshire Hathaway’s’ genRe did not end up on the list, if it was ever under any consideration.
It was back in November 2010 when G20 leaders endorsed the FSB’s framework for reducing the moral hazard posed by systemically important financial institutions. This was a few months after the passage of the Dodd Frank Act domestically.

The IAIS, a member of the FSB, is the international standard setting body responsible for developing principles, standards and other supporting material for the supervision of the insurance sector and assisting in their implementation. 


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