FSB names systemically important insurers

Also Thursday, the International Association of Insurance Supervisors (IAIS) published a set of policy measures that, it says, are consistent with the FSB policy framework, which is comprised of: recovery and resolution planning requirements; enhanced group-wide supervision; and, higher loss absorbency requirements.

For the initial list of G-SIIs, the FSB says that the implementation of enhanced group-wide supervision is to commence immediately; crisis management groups should be established by July 2014; and the recovery and resolution planning requirements should be met by the end of 2014.

As for the higher loss absorbency requirements, the IAIS will first develop straightforward capital requirements to apply to all activities, including non-insurance subsidiaries, to be finalized for the G20 Summit in 2014. Implementation details for higher capital requirements will be developed by the end of 2015, and will apply starting from January 2019 for G-SIIs identified in November 2017, it says.

“Today marks an important step toward 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. A sound capital and supervisory framework for the insurance sector is essential for supporting financial stability,” said Mark Carney, chairman of the FSB.

Tougher regulation would have mixed impact on firms

Commenting on the FSB’s initial list, Fitch Ratings suggests it would have a mixed impact on the firms.

The rating agency says that while the higher risk and capital management standards imposed on them could boost their credit profiles, their ratings are already high and don’t have much room to improve. Moreover, it notes that the benefit of a stronger credit profile could be diminished if the extra capital they have to hold for specific products makes them less competitive and damages their market position.

As it is, the ratings of the nine firms are more likely to be limited by their earnings power and market position than by capital adequacy. However, some of the insurers do have high debt leverage, which could be reduced by any additional capital they may have to hold, it says.

“The decision to apply extra capital requirements only to non-traditional insurance business indicates a focus on risk, rather than just size, and is in line with the approach underlying our ratings,” Fitch says. “This also limits the impact that the GSII requirements will have on balance sheets, especially as few large insurers any longer underwrite credit default protection products such as those that got AIG Financial Products into trouble.”

However, it notes that other products, potentially including variable annuities, may face higher capital requirements. “We already view these products as a potential source of risk, which is factored into ratings,” it says.

The added regulatory requirements for GSIIs will be introduced over a long timeframe, Fitch says, with the additional capital requirements not likely to come into force until 2019. “This adds to the uncertainty about the final impact as it gives insurers time to either lobby for further changes or to restructure or sell businesses in order to be removed from the list or limit the additional capital requirements,” it says.

“We believe that the relatively low number of firms that have been included means insurers are more likely to try and get themselves removed from the list as they are more likely to see it as a competitive disadvantage,” Fitch suggests.