The financial crisis of 2008 highlighted the need to strengthen the supervision and control of financial institutions designated as “too big to fail”. As part of a global initiative to reduce the moral hazard posed by Global Systemically Important Financial Institutions, greater focus has been placed on potential Global Systemically Important Insurers (G-SIIs).
The initial list of G-SIIs comprises nine insurance companies with home jurisdictions in the US, Europe and China. Through the course of this blog series, I’ll look at how a changing international regulatory landscape will impact these G-SIIs as well as on other international insurance groups.
The work of the International Association of Insurance Supervisors (IAIS), which is responsible for developing these G-SII measures, also includes additional requirements targeting internationally active insurance groups (IAIGs). Thus, the G-SII initiative is only one part of a global framework which has the overall goal of defining an insurance capital standard which could be applied to the entire insurance industry.
To understand the impact of the proposed new global standards, we should take a step back and evaluate the context in which they were developed as well as their intentions. The financial crisis helped confirm the overall resilience and strength of the insurance business model. Yet it also demonstrated that the systemic relevance of insurance groups correlates with activities outside the traditional insurance business field.
As a result, the IAIS is defining the sources of systemic risk, due mainly to non-traditional insurance and non-insurance (NTNI) activities, or as a result of interconnectedness (the extent to which an activity and/or product is linked to the financial markets). Other considerations include the institution’s size, global activity and its “substitutability” — its capacity to continue providing services (insurance coverage).
Thus, our understanding is that the underlying intention of regulators is: to discourage the development of NTNI activities and interconnectedness by applying higher capital charges; to minimize the impacts of failure by developing effective resolution plans; and to specifically oversee systemic institutions.
We believe insurers should keep a close eye on the wide package of IAIS measures. The development of this comprehensive framework of reforms involves more than just capital and may affect each insurer—whether a G-SII, an IAIG, or a domestic systemically important insurer. My next post will look at some of the new global regulatory requirements in more detail.