Wednesday, 30 July 2014
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Monday, 22 July 2013

Global systemically important insurers named by FSB/IAIS

By Tony Dowding
Email Author

The International Association of Insurance Supervisors (IAIS) has released its assessment methodology and policy measures for global systemically important insurers, or G-SIIs, as well as an overall framework for macroprudential policy and surveillance. The assessment methodology and policy measures were endorsed by the Financial Stability Board (FSB), which is coordinating global efforts to reduce the moral hazard posed by global systemically important financial institutions, or G-SIFIs.


Michaela Koller, Director General of Insurance Europe

The FSB, in consultation with the IAIS and national authorities, has identified an initial list of G-SIIs to which the IAIS policy measures will apply. These G-SIIs have been identified using the IAIS assessment methodology and the list will be updated each year in November, starting from next year.

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., and Prudential plc.

Commenting on the listing, Insurance Europe said that the methodology used to create the list of insurers that have been identified by the FSB and IAIS as potentially posing systemic risk to the financial system 'has not been sufficiently tailored to the insurance business model. Likewise the measures that the FSB/IAIS propose to apply to those insurers are not aligned with the actual risks posed by insurers.'

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The IAIS' assessment methodology identifies five categories to measure relative systemic importance: non-traditional insurance and non-insurance (NTNI) activities, interconnectedness, substitutability, size and global activity. Within these five categories are 20 indicators, including: intra-financial assets and liabilities, gross notional amount of derivatives, Level 3 assets, non-policyholder liabilities and non-insurance revenues, derivatives trading, short term funding and variable insurance products with minimum guarantees.

The IAIS said the two most important categories for assessing the systemic importance of insurers are the NTNI category and the interconnectedness category.

The IAIS has developed a framework of policy measures for G-SIIs based upon the general framework published by the FSB with adjustments that, as with the proposed assessment methodology, reflect the factors that make insurers different from other financial institutions. The proposal consists of three main types of measures: enhanced supervision, including the development of a Systemic Risk Management Plan and enhanced liquidity planning and management; effective resolution, including the establishment of Crisis Management Groups, and plans for separating NTNI activities from traditional insurance activities, and the potential use of portfolio transfers and run-off arrangements; and Higher Loss Absorption capacity.

False impression

Insurance Europe said that traditional insurance business has been shown not to create or amplify systemic risk, since the business is long-term, funding is generally upfront and liquidity risk and interconnectedness are low. The ability of the insurance industry to take a long-term approach has been widely recognised as allowing it to reduce rather than amplify systemic risks and overall market volatility.

"Insurance Europe supports efforts by policymakers to ensure financial stability. However, a system that leads to the identification of insurers, rather than specific activities, that might pose systemic risk is not correct," said Michaela Koller, Director General of Insurance Europe.

She added, "Creating a list of global systemically important insurers (G-SIIs) gives the false impression that insurers are systemically important in the way that banks are. Yet insurance companies and banks have fundamentally different risk profiles, notably in terms of the risk they pose to the financial system."

The methodology used by the FSB and IAIS has been excessively based on that used to identify systemic risk in the banking sector. "We welcome the recognition by the FSB and IAIS that the size of an insurer, in and of itself, does not create systemic risk concerns. Nevertheless, the methodology being proposed still produces a list of large insurers so we believe it needs further refinement," said Ms Koller. "In insurance the larger the company or group usually the greater their geographic and risk diversification."

Insurance Europe believes that the measures that the FSB/IAIS proposes to apply to the insurers on the list also excessively mirror those developed for the banking sector. This has resulted in measures designed to facilitate an expedited resolution process being applied unnecessarily to insurers, which can usually be run-off in an orderly manner over time should they run into financial difficulty. Likewise, higher loss absorbency requirements are typically a measure used in banking, which is generally not suited to addressing potential systemic risk concerns in insurance.

"The proposed framework is too broad, covering activities that do not raise systemic risk concerns, and overlaps with existing prudential regulation," said Ms Koller. "We believe that greater emphasis should be put on insurers' robust governance and risk management practices, as well as greater acknowledgement of sound supervisory frameworks that currently exist or are already in the process of being developed."

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