Other parts of this series:
- North American insurers face international capital standards
- Several tough challenges for too-big-to-fail insurers
- Potential changes in capital standards could affect largest, international carriers
- Some capital standards deadlines missed, others are ambitious
- How insurers should respond to international capital standards
Last time, I reviewed the three global systemic risk regulatory architectures that North American insurers and their counterparts around the world will have to contend with soon. This time, I’ll discuss the measures that likely will require particular attention and greater investment from the nine carriers in the United States, Europe and Asia that the G20’s Financial Stability Board (FSB) has deemed Global Systemically Important Insurers (G-SIIs), or “too big to fail.”
As Accenture details in its report, “The Rise of Global Standards and How Insurers Can Comply,” G-SIIs face the strictest capital requirements and other measures from the International Association of Insurance Supervisors (IAIS), because of the systemic risks they pose to the financial system. The industry has widely commented on the latest proposal for this group’s Higher-Loss Absorption (HLA) calculation, which applies to non-traditional and non-insurance (NTNI) activities, triggering an average 10% increase in regulatory capital requirements. A group’s HLA is the additional level of capital it must retain to account for its systemic risk.
One particularly challenging requirement mandates that each G-SII develop a Systemic Risk Management Plan (SRMP) to lay out how it intends to manage, mitigate and reduce its systemic risk. An SRMP must include an explanation of how the carrier’s enterprise risk management framework and control framework would contribute to that effort.
A group-wide supervisor also may ask a G-SII to beef up its SRMP with strategies for separating its NTNI activities from its traditional insurance operations. NTNI activities can include leveraging, liquidity or maturity transformation, imperfect credit risk transfers such as “shadow banking” and credit guarantees or minimum financial guarantees. The interconnectedness of financial markets to insurance products and activities drives systemic risk, the IAIS has determined. Therefore, how effectively NTNI activities are separated may affect the IAIS calculation for that insurer’s HLA.
Each G-SII also should have an ongoing Recovery and Resolution Planning (RRP) process that, minimally, covers the domestically incorporated firms that could be systemically significant or critical if the insurer fails. An RRP should cover how a business would be maintained or restored in a sustainable way in the event of financial distress. Insurers’ senior management must provide the information that resolution authorities need to prepare and assess recovery plans.
To learn more about the study, read “The Rise of Global Standards and How Insurers Can Comply.”
Next time: The impact of an expected capital requirement modification.