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Industry Takes Aim at Financial Stability Board's Methodology for Global Systemically Important Insurers

Source: A.M. Best - Jeff Jeffrey

Posted on 22 Jul 2013 by Neilson

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Financial Stability BoardInsurance trade organizations are lining up against the methodology used by the G-20's Financial Stability Board to identify an initial list of global systemically important insurers.

The American Insurance Association, Insurance Europe and the Property Casualty Insurers Association of America released statements criticizing the FSB for declaring that several insurers could pose systemic risks to the global financial system.

The FSB released July 18 an initial list of G-SIIs that will be subject to additional regulatory oversight and higher capital requirements. The initial list includes Allianz SE; American International Group, Inc.; Assicurazioni Generali S.p.A.; Aviva plc; Axa S.A.; Metropolitan Life Insurance Co. Inc.; Ping An Insurance Company of China, Ltd.; Prudential Financial Inc.; and Prudential plc.

To make the designations, the FSB relied on a methodology released by the International Association of Insurance Supervisors late July 18. The IAIS said the methodology gave consideration to the fact that "the traditional insurance business model is different from banking and, in particular, that traditional business does not involve payment system, credit intermediation or investment banking services." The initial assessment methodology involves three steps: collection of data, methodical assessment and a supervisory judgment and validation process.

However, the FSB announcement did not include details on capital requirements or on some of the new regulations G-SIIs will face as a result of their designation. Industry trade groups offered sharp criticism of the FSB announcement for what they said was a lack of clarity.

Insurance Europe, which represents 34 insurers and reinsurers in Europe, said the methodology was not sufficiently tailored to the insurance business model. Michaela Koller, director general of Insurance Europe, said traditional insurance businesses do not create or amplify systemic risk because insurance is long-term, funding is generally up front and liquidity risk and interconnectedness are low. "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," Koller said.

Koller went on to say that creating a list of G-SIIs gives the false impression that insurers are systemically important in the way that banks are. She said FSB should have emphasized governance and risk management practices, as well as acknowledging the supervisory frameworks that currently exist or that are being developed, as is the case with Solvency II.

AIA President and Chief Executive Officer Leigh Ann Pusey said her organization was concerned the methodology focused solely on insurers, rather than all other types of financial institutions. "As a result, we are not confident that the process yielded results based on objective systemic risk criteria," Pusey said. "This has also led to artificial distinctions in the methodology between traditional and nontraditional types of insurance activities that may not be based on systemic risk and may unfairly stigmatize those types of insurance that are deemed nontraditional."

Pusey said she was also concerned the IAIS is still in the process of developing capital requirements and that the methodology overemphasizes a company's size. "If companies are incorrectly designated as G-SIIs, application of heightened capital standards could end up either harming their ability to compete or could unintentionally lead to the type of systemic threat that the FSB and IAIS are trying to avoid," Pusey said.

PCI's Dave Snyder, who serves as vice president for international policy, offered qualified praise for the FSB announcement, saying it "implicitly recognized that the vast majority of insurance companies are not systemically important by designating as G-SIIs only a very small number of insurance companies."

However, Snyder said the FSB should re-evaluation of the systemic risk issue in the context of U.S. developments to ensure that the benefits of any additional regulation exceed their costs and that good companies are not harmed. "In this connection, we strongly support the interest among members of Congress for representatives of the U.S. engaged in international regulatory issues to coordinate closely and adhere to principles that benefit, not harm, healthy, competitive U.S. insurance companies, our regulatory system and insurance markets both here and abroad," Snyder said.