Posted on 24 Jun 2009
Global insurance industry regulators are set to begin talks this week on creating the first common rules on solvency requirements for international insurers in an effort to prevent crises like that which nearly buried American International Group Inc. (AIG) last year, people familiar with the issue have told Dow Jones Newswires.
At a three-day meeting in Taiwan scheduled to start Wednesday, those people said the International Association of Insurance Supervisors is expected to hammer out a detailed schedule to come up with requirements for major insurers' solvency margin ratios. The move is in line with a mandate handed down by leaders of the G20 countries last November triggered by a U.S. Federal bailout of the country's biggest insurer that now tops $180 billion in overall value.
Solvency margins are a key gauge of how much capital an insurer has measured against risks: the higher it is, the better equipped a firm would be if faced with unexpected investment losses or surges in claims. As well as AIG, international insurers like Prudential PLC (PUK), MetLife Inc. (MET) and Tokio Marine Holdings Inc., could be affected, while big European players, which will likely become subject to tighter regional rules in coming years, may be less involved.
"The goal is to build a framework to enable regulators to examine things without being hindered by regulatory differences (among countries) and grasp risks in the global insurance system," one of the people said.
Though non-binding and likely to take years to finalize, given that the IAIS represents insurance regulators from around 140 nations, observers say new rules on solvency margins would carry significant weight.
"If there are unified gauges or regulatory standards...they could help improve the transparency of insurance groups operating globally," said Kenji Kawada, a director at credit rating agency Fitch Ratings. The global attempt to create common capital rules "could help (insurers) deepen their understanding of how important it is to enhance their capital positions."
Speaking under condition of anonymity, the people familiar with the situation said many details of possible new rules still need to be worked out. But one element that will be central to any changes that the solvency ratio requirements will be applied to all group companies of insurers, including non-insurance businesses, rather than just the insurer itself, the people say.
That would largely be a reaction to AIG's near-failure in 2008 that stemmed from huge losses suffered by a non-insurance U.K. subsidiary, which guaranteed high-risk investments that later turned sour. Neither the unit nor AIG as a group had enough of a buffer against the damage, partly because U.S. regulation lacked group-wide capital requirements.
AIG's woes helped destabilize the already shaky global markets, prompting the U.S. government to bail it out in September on concern about the danger a collapse could pose to the financial system. The bailout started with a loan for up to $85 billion, but the price tag has since billowed to somewhere around $182 billion.
Insurer solvency requirements already exist in advanced industrialized countries, and many of them also have group-wide capital rules, the people familiar with the situation said. But the minimum regulatory ratios, and the way they are calculated, vary from country to country.
For example, while Canada and Japan both require a 200% solvency margin ratio, the formulas they use to calculate the figure differ, the people said. Many European nations now demand a minimum 100% ratio, but based on yet another calculation method.
The AIG debacle has prompted the U.S. government to include plans to oversee all insurer group companies, including non-insurance units, in its own regulatory reform proposals, issued last week. Other nations are tightening checks on insurers as well, with the European Union moving toward adopting a new regulatory regime called Solvency II.
The complexity of insurance regulation in the U.S. is one issue that will do little to accelerate the IAIS plan. Insurance regulation is currently a 50-state regulatory matter rather than a federal issue, something the Obama administration hopes to tackle in its reforms.
"The U.S. is the only country in the IAIS...that is not represented by a federal insurance regulatory entity able to speak with one voice," the administration's white paper on financial reform noted.
"U.S. state insurance regulators have been very slow to improve their regulatory system despite the AIG mess," said one person familiar with the IAIS' plans. "So most IAIS members took the (recent U.S. reform) proposal as a very positive step."
But while introducing new solvency norms, the IAIS is keen to convey the message that it doesn't want to over-regulate the insurance industry, people familiar with the matter said.
"What we want to do is to make insurance groups be aware of group-wide risks and avoid excessive risk-taking," said one, "and have them build appropriate levels of capital that are needed to protect their policy holders upon crises. We don't intend to introduce unnecessary regulation."
But regulators do want to make rules that are consistent all over the world, a reaction to the increasingly global nature of many big insurers' operations. Since the 1990s, large insurers have sought more and more of their business outside of their home countries, but current regulations only apply on a national or regional, rather than a global level.
Unified rules could benefit insurers as well, by reducing the costs of coping with different regulation in various countries, insurance industry analysts say.
The IAIS has no specific proposals yet on how high the common solvency margin ratio should be, the people said. It first must determine more basic details like the definition of capital, risk weights of each type of asset or liability held by insurers, and a formula to calculate the ratio.
In its plan to be endorsed this week, the IAIS will likely set deadlines for its task forces to decide those key details in addition to the ratio, the people said.
Within a couple of years the organization is expected to come up with a "tentative" ratio, those people said. More time-consuming would be the next stage, where members need to conduct feasibility studies on their own and iron out their competing interests, they said.