Insurers concerned with the IAIS' weighting method for identifying G-SII

IAIS puts big insurers on the scales (One-ton cheeseburger, AP Photo/Black Bear Casino Resort) IAIS puts big insurers on the scales (One-ton cheeseburger, AP Photo/Black Bear Casino Resort)

Global insurers and reinsurers voiced a host of concerns with the proposed methodology the International Association of Insurance Supervisors (IAIS) developed for determining globally systemic important insurers (G-SII). With many agreeing with the organization’s stated tenets that traditional insurance is not systemically risky, then finding fault with the disconnect between the statements and the way in which the methodology is formatted. This may lead to the classification of traditional/core insurance as systemically risky, and the imposition of stricter than necessary regulatory treatment.

Insurers want a very high bar set for the G-SII designations, if they even agree with a blanket designation of a whole enterprise at all. 

The G-SII designation is a product of the IAIS, which was charged by the G-20 established  Financial Stability Board (FSB) to develop an international architecture for insurance supervision so another worldwide financial crisis does not occur. Comments culled through several months were finally posted late Wednesday in a table format.

Insurers were concerned that some aspects that are fundamental to many insurers and standard insurance business, such as the use of derivatives like credit default swaps (CDS) for hedging purposes, the purchase of local government debt, financial guaranty insurance and even the sale of variable annuities could propel a company into a G-SII designation.

Interconnectedness of an institution to the global financial system is one of five assessment categories the IAIS uses to determine G-SIIs. Its weighting is 30% to 40% as a category in determining G-SIFIs. But insurers are concerned that measuring interconnectedness involves chiefly traditional insurance activities and not significant systemically risky activities.

The American Council of Life Insurers (ACLI) and others pointed out that even if insurers do large amounts of derivatives trading the level of derivatives activity (and counterparty exposures) at even the largest insurers is dwarfed by that of the largest banking groups.  

The ACLI told the group of insurance supervisors managing the project under the banker-heavy FSB, that “the relative global systemic significance of an insurer must be measured against that of all global systemically important institutions, and not against other insurers. Such a comparison should be based on similar non-insurance activities undertaken by each institution."

"Since it is well established that the high degree of interconnectedness and the holding of overwhelming short-term liabilities that are fundamental to the banking industry’s business model are also the characteristics that lead to systemic significance, we believe comparing insurers against all financial institutions and their relevant market data will demonstrate the significantly less systemic importance of any potential G-SII. The life insurance industry shares neither of these characteristics, and any such assessment should reflect as much. It would be improper to ignore this fact and to move forward with a G-SII designation simply for the expedience of ‘including an insurer in the mix.’," the ACLI stated.

MetLife said that, while size should be one of the factors (among others) to consider whether unmitigated systemically risky activities conducted by an insurer expose it to failure of systemic proportions, the size of a company and its global reach should be eliminated as criteria from the assessment as they are not a measure of systemic risk. To the contrary, they can reduce a company’s risk profile through diversification which the IAIS recognizes several times in its commentary.”

Companies like ACE Group and others protested the weighting in the assessment categories given to a company’s sheer size and global activity, arguing that such factors already form a threshold of the initial 48 companies surveyed, and that size and reach help spread the risk, not increase it.

Companies also said they don’t like the stigma attached to even being asked to supply data.

“We understand that the IAIS is focused on the impact a failure would have on the global economy and that the impact is obviously correlated to the size and global reach of the insurer, however size and global activity are already being considered as thresholds to develop the initial population of companies to consider. Providing for additional weighting based on size and global activity seems to be double counting these factors and ignores the noted stability that companies gain by size and geographic spread,” ACE stated in its comments. 

The American Insurance Association (AIA) suggested that the IAIS follow the U.S. approach for Systemically Important Financial Institutions (SIFIs) under Dodd-Frank Act implementation and pre-screen candidates, “using a tiered process that starts with universally-applicable quantitative measures that align with designated ‘systemic risk’ categories ‘of size, interconnectedness, leverage, and liquidity risk and maturity mismatch,’ appropriately tailored to the broad assessment categories."

Such an approach would include both quantitative benchmarks for comparison, as well as a method of initial screening based on activities to reflect the inclusion of the G-SII assessment category keyed to non-traditional, non-insurance activities,” the AIA stated.

The NAIC focused on the distinction between the two: In weighting the categories, non-traditional (insurance) activities should be segregated from non-insurance activities in the indicators. Non-traditional activities should receive a lower weight than non-insurance activities," the NAIC stated.

The AIA even wants the processes tied together “...because of the global nature of the G-SII assessment process, any thresholds that are based on the U.S. SIFI determination process will need to be adjusted upwards. We would further recommend that those adjusted metric or activities-based thresholds be used to limit the companies that are subject to any subsequent G-SII data call.” 

“The insurance business is based on the law of large numbers, that as the number of risks in a portfolio increases, the riskiness of the portfolio decreases, as the lines of business and geographies increase, it diversifies further, reducing the risk of the overall portfolio,” The Geneva Association told the IAIS. 

The Geneva Association’s Secretary General John H. Fitzpatrick had suggested in comments to the media in New York last week that perhaps the FSB is coloring a lot of the process, given how the statements of the IAIS are not aligned with the process. The IAIS shrugged off any charges of international banker influence on the assessment process, although the FSB must ultimately select and sign off on the G-SIIs.

The Geneva Association, still, stated that it does not see the need for G-SII methodology to reflect similarities to the banking G-SIB methodology due to the acknowledged differences in the business models between the insurance and banking industries. The proposed indicators chosen for the insurance industry are very similar to those introduced for the banks with size being a driving factor. The indicators therefore insufficiently reflect insurance specifics,” it said in comments. 

Another big component for insurer concerns were the data calls themselves, from protecting the confidentiality of the data, to which companies would be surveyed, to those who were left out because they are state-owned, as in Japan, China and India, although extremely large, to apples to apples comparisons of assessments given the different insurance accounting standards used worldwide and if there was a need for nonpublic information in a second assessment until the IAIS had finally skimmed the top candidates from the group, as is done with the United States process. 

FIO Steps in to Collect, Pass Through Insurer Data to IAIS 

Of interest, the Federal Insurance Office (FIO) will now oversee the second data call, not the state of Connecticut, which had special pass-through powers to the international body under state law to act as a conduit of confidential insurance information and held the recipient, the IAIS, to the same standards of confidentiality. While this method passed muster with some insurers, although others had concerns.

Some parties want the second data call delayed until the methodology is fully reworked.

There are still concerns with the FIO’s role, which will be acting as a conduit in collecting confidential information (if this occurs) from the industry. It is unclear if the FIO, which now has enough staff to support such an operation, although treasury won’t confirm the number, will also be holding the information. Connecticut deleted the information at midnight from its computers. 

"Confidentiality of data and identity are particularly critical here for U.S. insurers, where the FIO would be carrying out data collection activities on behalf of the IAIS," the AIA stated in its comments.

The NAIC expressed concern that the IAIS methodology to "clearly indicate how companies that do not fully comply /respond to the data call with be dealt with, i.e. it should specify what will be the default assumption(s) that will apply to companies that do not provide all the data items."

The ACLI noted that the indicator-based assessment approach should only be applied after an initial review based on publicly and non-public regulatory available information has identified substantial actives warranting further review.”

The IAIS is expected, although there is some resistance, to initiate the second data call shortly after the conclusion of this comment period, begin a consultation on G-SII policy measures later this year, and then release simultaneously the final assessment methodology along with the list of G-SIIs in “the first half of 2013.”

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