2013-07-19 – London
‘Financial Contagion Inoculation’ administered to nine global insurers
The Financial Stability Board (FSB) has announced the names of nine global insurance giants, labelled “Global Systemically Important Insurers” (G-SIIs), that will face tighter regulation and higher capital requirements because regulators have determined that they are critical to the functioning of the global financial system. This follows the G20 endorsement in November 2011, at the Cannes Summit, of an integrated set of policy measures to address the risks to the global financial system from systematically important financial institutions (G-SIFIs).
The list of G-SIIs includes the UK’s Aviva and Prudential, Germany’s Allianz, AIG of the US, French group AXA and Ping An Insurance (中国平安) of China. The G-SIFIs will be supervised more tightly by colleges of national regulators and will require so-called living wills, designed to make them easier to wind down in a crisis.
The publication of the list follows the methodology which the International Association of Insurance Supervisors (IAIS) published yesterday for identifying global systemically important insurers (G-SIIs), along with a set of policy measures that will apply to them.
The FSB used the IAIS assessment methodology based on 2011 data to identify the initial list of G-SIIs. The list will be updated annually and published by the FSB each November based on new data, starting from November 2014.
Policy Measures
The policy measures which have been published by the IAIS are consistent with the policy framework which was published by the FSB in November 2011. They include for each G-SII:
i. The recovery and resolution planning requirements under the FSB’s Key Attributes of Effective Resolution Regimes, in particular:
- the establishment of a Crisis Management Group (CMG);
- the development of a recovery and resolution plan (RRP), including a liquidity risk management plan;
- the carrying out within the CMG of resolvability assessments;
- the development of institution-specific cross-border cooperation agreements among relevant resolution authorities.
ii. Enhanced group-wide supervision, including:
- the group-wide supervisor to have direct powers over holding companies.
- the group-wide supervisor to oversee the development and implementation of a Systemic Risk Management Plan.
iii. Higher loss absorbency requirements (HLA) for non-traditional and noninsurance activities. In the absence of a global capital standard as a basis, these will be built upon straightforward, backstop capital requirements for all group activities, including non-insurance subsidiaries. HLA requirements will need to be met by the highest quality capital.
Daniel de Bruin, managing partner at Modelling Design Partners, said “this approach can be seen as a kind of Financial Contagion Inoculation, where the nine most systemically important insurance companies are treated more strictly to ensure they hold extra capital while the system is in a relatively stable state. There are questions surrounding the appropriateness of using data from 2011 to determine the list of insurers to ‘inoculate’. Some might argue that it may have been more appropriate to use data from 2012”.
Mark Carney, Bank of England governor and FSB chairman, said “today marks an important step towards more broadly addressing the risks associated with systemically important financial institutions. These policy measures will be followed over time by a substantially strengthened comprehensive regulatory and supervisory framework for all internationally active insurers”.
The insurers named today join 28 global banks that were designated as G-SIFIs earlier this year, which also face substantially higher capital charges.
Some industry experts have criticised the methodology used to designate the G-SIFIs. Shares of the European-listed insurance groups on the list were lower on Friday morning in line with the overall market.
