The G-20’s Financial Stability Board (FSB) says it will identify in July global insurers it deems so important and interconnected to the worldwide insurance economy that tighter and more comprehensive worldwide supervision is warranted.
Despite the fact that many in the global insurance world have argued there should be no Global Systemically Important Insurers (G-SIIs), as they are called, the International Association of Insurance Supervisors (IAIS) submitted a list to the FSB, which issued a release from Basel, Switzerland today following its meeting yesterday.
The IAIS would not disclose the names of the insurers or say whether any U.S. companies were among them.
Companies such as Prudential Insurance, AIG, Berkshire Hathaway and MetLife as well as various U.S. property insurers that do business globally were candidates for review, as were many global insurers and reinsurers. All told, the IAIS had requested nonpublic data from about 50 global firms, 14 of which are U.S. based.
The insurers identified as G-SIIs in July will be subject to policy measures that include enhanced group-wide supervision and higher capital requirements. They will also need to be able to show they can plan for their own orderly demise, should they fail.
A decision on the G-SII status of measures for major reinsurers will be made the following July, in 2014.
Unlike the U.S. process to determine systemically important financial institutions (SIFIs), the FSB says in an email that its designations will be final and firms will not be allowed to contest the designation.
The FSB says its list of G-SIIs will be reviewed each year, based on updated data, and firms may be removed if their assessed systemic risk declines.
As for the capital requirements to be imposed, the IAIS will develop “straightforward, backstop capital requirements to apply to all group activities, including non-insurance subsidiaries, to be finalized by the time of the G20 Summit in 2014,” the FSB states in its release.
For the industry, questions remain. It is unclear if the U.S. Financial Stability Oversight Council (FSOC), which has proposed so far just two insurers as domestic SIFIs—Prudential and AIG—would implement the IAIS measures and methodologies.
In recent testimony before the House Financial Services Subcommittee, Federal Insurance Office (FIO) Director Michael McRaith noted that the FSB is not a regulator and does not have authority to impose any enhanced measures on a G-SII. But he did say that “a G-SII designated by the FSB would then be delegated to the national authority for consideration,” although who that national authority is—the FSOC, the Federal Reserve or even the National Association of Insurance Commissioners (NAIC)—is unclear to some.
However, McRaith said during the question and answer portion of the hearing that "any determination at the FSB level for any company would be referred to the domestic authority, the domestic risk analysis process and in the United States that's the Financial Stability Oversight Council."
Insurers complain they are not in the inner circles of the IAIS process, that it has not been a transparent process, and that they do not know what the final policy measures are. Most insurers are concerned that the G-SII process does not reflect the industry’s view that insurers, by and large, do not pose a systemic risk.
The issue of variable annuities as systemically risky is also hotly debated among U.S. industry and regulators.
Nontraditional activities are discussed in the IAIS proposed methodology and the life insurance industry in multiple countries has, for example, argued against the assessment methodology classifying variable annuities as a non-traditional insurance business. The property and casualty industry's non-traditional, non-insurance activities would be extended to reinsurance or insurance of catastrophe risk.
In fact, McRaith, in the House panel's recent testimony, also discussed variable annuities, noting that the IAIS “has worked diligently to improve and refine the methodology so that risks presented by firms are properly assessed and so that the results are accurate. For instance, the IAIS has to be thoughtful about whether it is overstating the risk presented by firms that have portfolios of variable annuities. Some firms offer variable annuity products similar to traditional insurance while others offer variable annuities with features that are more like a security or bank product,” McRaith stated in testimony.
“The IAIS is committed to sorting through these difficult data and complex definitions,” stated McRaith, who is a key member of the IAIS and who, with FIO staff, is very involved in its top committees. McRaith is a nonvoting insurance member of the U.S. stability council, FSOC.
In addition, Federal Reserve Gov. Daniel Tarullo appeared to urge careful consideration by international regulators on their future actions in designating insurers as non-bank systemically important financial institutions (SIFIs) in remarks Feb. 22 in New York. “It is important to take the time to evaluate carefully the actual systemic risk associated with these [insurance] companies, and to understand the amount of such risk relative to other financial firms, before fixing on a list of firms and surcharges,” Tarullo stated then. (Earlier this year, Tarullo called for prudence in G-SII designations.)