Insurers face new wave of compliance costs

Insurers could face greater compliance costs and capital requirements, along with changes to their business models, under new regulation that would see certain insurers classed as ‘too big to fail’.

According to consultancy Deloitte, insurers may follow banks in having to commit significant resources to preparing recovery and resolution plans (RRPs).

An RRP comprises the measures a company would take to ensure either its continued existence or, if that failed to restore the strength of the firm, an orderly wind-down.

“Regulators’ preoccupation with RRPs originates in the banking crisis,” a Deloitte report stated. “Many banks were simply ‘too big to fail’ and required public support. As a consequence, governments and regulators have an understandable ‘never again’ attitude.”

In the UK, the Prudential Regulation Authority (PRA) has indicated that insurers’ ability to ‘recover or resolve’ following a major financial crisis will form part of its supervision of the market.

The PRA now expects insurers to provide all information needed to assess their resolvability, identify barriers to resolvability and propose changes to reduce them, and set out steps to maintain or restore the business in the event of stress. It is still deliberating on whether to introduce a formal RRP requirement.

In the EU, the European Commission has consulted on recovery and resolution regimes for non-banks, and its proposal in response to the consultation is expected in November. It recently stated that any legislative proposals will focus on systemic entities, with the goal of preserving financial stability.

Meanwhile, the International Association of Insurance Supervisors is due to publish a list of global systemically important insurers (G-SIIs), which will be revised annually. Once identified, these insurers will have to comply with the Financial Stability Board’s key attributes of effective resolution regimes for financial institutions, which include a formal requirement to prepare an RRP.

G-SIIs will also be subject to enhanced supervision measures and higher capital requirements. Exact policy measures are still being finalised, but Deloitte stated that the focus is likely to be directed towards non-traditional, non-insurance activities by the companies concerned.

As a result, insurers may need to reassess their involvement in certain products or markets, such as financial guarantees, variable annuities and stock lending, if deemed a threat to their resolvability.