International insurance think tank, The Geneva Association, published its response to the International Association of Insurance Supervisors’ (IAIS) public consultation, Proposed Policy Measures for Global Systemically Important Insurers, on Sunday, December 16.
The Property Casualty Insurers Association of America has also issued its response to the IAIS proposals, which points out that it is “better target its proposed ‘policy measures’ for any insurance groups found to be ‘global systemically important insurers’ (G-SIIs) to systemically-risky activities, rather than affecting the insurance business of any selected groups.”
The Geneva Association’s response is the latest in a round of discussions that has been ongoing since the onset of the financial crisis, and the debate over whether large insurance groups should, like many banks, be deemed “too big to fail,” which would require more oversight and capital. Its most recent paper compared 28 banks and insurers.
The Geneva Association’s response suggested three steps that should be considered for applying appropriate policy measures to insurers in, what it termed, an escalating “ladder of intervention,” as follows:
1. Positively identify, and explain the rationale for selecting, the non-traditional, non-insurance (NTNI) activities that are Systemically Relevant (SRAs) and consider whether the insurance group can appropriately handle the SRA through its internal processes, risk governance and capital position.
2. Ensure that the SRA is carefully considered and that it would not impact the group’s insurance activities.
3. Ensure that the company’s liabilities and capital for all SRAs address all material categories of risk associated with that activity.
“Developing and promoting effective regulatory, supervisory and other financial sector policies to improve financial stability and address information gaps is vital to ensure the smooth functioning of the global financial sector,” stated the Geneva Association’s Secretary General John H. Fitzpatrick. “The designation process for global systemically important insurers needs to reflect the facts as described in The Geneva Association’s recent Cross-Industry Benchmarking report and the specific characteristics of the insurance industry and its business model.”
Daniel Haefeli, Head of Insurance and Finance at The Geneva Association noted that the Association “does not support group-wide HLA which is not an appropriate tool to manage systemic risk in insurance and is counterproductive for insurance from a macro-economic, micro-economic and business model perspective. Insurers have technical provisions/reserving, which is the case for all insurance activities, both traditional and non-traditional. This must be considered before applying any HLA to a sector whose role it is to absorb loss and risk, and to protect capital.”
Fitzpatrick concluded: “When considering the impact of any potential policy measures on policyholders and insurers, it is worthwhile considering the valuable role insurance plays in protecting customers from various risks, encouraging and managing essential long term savings and retirement income and the social implications that may stem from a lack of insurance capacity.”
Source: The Geneva Association