Systemically important insurers list draws mixed response

The publication by the Financial Stability Board (FSB) of a list of nine insurers whose failure would pose systemic risk to the global financial system has drawn a mixed response, as debate over the methodology used to draw up the list continues, and the FSB’s proposed measures have been called into question.

The list, which will be published annually from November 2014, requires each of the insurance companies it mentions to implement a raft of resolution and planning requirements.

Firms will also be subject to heightened scrutiny and must ensure they meet higher loss absorbency requirements.

Deloitte Centre for Regulatory Strategy co-head David Strachan said: “Publication of the list of global systemically important insurers [G-SIIs] will not end the debate or controversy.

“As expected, the list of nine G-SIIs is much shorter than the list of 28 global systemically important banks (G-SIBs). This reinforces the point that has been made by the insurance industry all along, namely that insurers generate much less systemic risk than banks. This key distinction is reflected in the policy measures which the International Association of Insurance Supervisors (IAIS) has put forward.

“To date, the focus of the FSB’s recovery and resolution plan (RRP) work has been banks. It is essential that RRPs for G-SIIs recognise the specificities of the insurance sector and are applied in a proportionate way.”

Ernst & Young global insurance regulatory and risk leader Martin Bradley added that the list meant that the methodology debate must now move on, but that firms could use their influence over the proposed measures.

He said: “With the designation of nine insurance G-SIIs, the FSB and insurance supervisors have made their position very clear. The insurance industry has argued long and hard against this designation, with reasonable justification given that insurers’ experience of the crisis has been significantly better than banks’, but the debate has now moved on. The designated G-SIIs will now need to develop recovery and resolution plans, but there are still opportunities to influence the scope of the requirements. Insurers should be able to use existing risk management processes in demonstrating that systemic risk is limited and well managed. We believe that by focussing on the isolated areas of non-traditional, non-insurance risk and perceived vulnerabilities within a group, the industry should be able to meet these requirements in a more manageable and cost effective way.” 

However, PwC insurance team partner Jim Bichard said that the move could help the insurance industry’s long-term preparation. “Whilst the debate around whether an insurer is systemically important is still contested, the release of this list represents the first step in a process which will potentially culminate in additional levels of regulatory capital being held. 

“The FSB has set the tone with its initial focus on G-SIBs and the development of stringent measures for this group, and we are now seeing similar frameworks being introduced into the insurance world.  

“From our perspective, banks have invested significantly, reflecting the level of effort and work required to address some of the new systemic policy measures, such as recovery plans. Some of the insurers on this list have already developed their own responses to these measures and it is this kind of early preparation which will help them in the long run.