October 17, 2012 3:18 pm

Drive to curb ‘too big to fail’ insurers

  • Share
  • Print
  • Clip
  • Gift Article
  • Comments

Regulators are planning to require insurers deemed “too big to fail” to set out how they propose to reduce the risks they pose to the financial system within 18 months of being given the label.

Insurers designated “systemically important” would need to draw up so-called systemic risk reduction plans, which could lead to restrictions on activities, such as financial derivatives, that are outside their core business.

Institutions that meet the criteria will also be required, like banks, to prepare so-called living wills – wind-down plans in the event of collapse – within the same timeframe.

Regulators are trying to prevent a repeat of the failure of AIG, which had been considered one of the strongest insurers but which the US government had to rescue during the 2008 financial crisis.

“We want to prevent the financial system from any type of systemic threat coming from the insurance industry,” said Peter Braumüller, chair of the executive committee at the International Association of Insurance Supervisors.

The IAIS said on Wednesday that it was likely to focus planned capital requirement increases on non-traditional or non-insurance business rather than entire balance sheets.

The industry welcomed the approach, which regulators had set out at a meeting last month. Any capital increases would not apply until 2019 at the earliest.

Still, Mr Braumüller said on Wednesday that aside from non-traditional business, other factors – such as interconnectedness to the wider system – “can cause problems”.

Groups unready
for new rules

Sixteen of Europe’s biggest insurance companies have admitted that they will not be
ready for the continent’s long-awaited regulatory overhaul even if it is delayed by another year as expected, writes Alistair Gray .

More than two-fifths of the 160 insurers questioned in an anonymous survey said that they would not be ready for Solvency II by the start of 2014, the existing deadline.

A tenth – including more than a third of insurers based in Germany – conceded they would not be ready for at least another year after that.

Ernst & Young, which conducted the study to be published today, said “integrating data and IT systems” was a “significant challenge”.

The European Commission is considering delaying implementation of Solvency II capital requirements to 2015.

Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority, has said Solvency II is unlikely to be implemented before 2015

Meanwhile, insurers warned that the definition of non-traditional business was a potential sticking-point.

The IAIS has indicated that activities including short-term funding, financial guarantees and variable annuities would fit the definition. But no final decision has been taken.

Hugh Savill, director of prudential regulation at the Association of British Insurers, said: “A massive book of credit default swaps is inherently different to variable annuity business.”

Regulators are planning to compile a list of insurers they consider too big to fail in the first half of next year.

Although up to 48 insurers may be designated systemically important, the IAIS has signalled that in practice the number will be “not too high”.

The FSB last year imposed across-the-board capital surcharges on 29 of the largest banks after looking at more than 70.

In setting out the criteria they plan to use to determine whether an insurer is systemically important, regulators said they would attach greatest importance to the scale of non-traditional business the groups conduct.

However the industry, through a trade body called the Geneva Association, has highlighted that traditional business is included in the assessment criteria and warned of unintended consequences.

The body claimed in August that designation might prompt insurers to cut holdings of government bonds as well as bank debt and equity.

Insurers have long maintained that they are less risky than banks, with entirely different business models.

Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.

  • Share
  • Print
  • Clip
  • Gift Article
  • Comments
Enter job search