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Insurers involved in risky activities outside their core business, such as derivatives trading, should hold extra capital to limit the danger they might destabilize the financial system if they go bust, global regulators said on Wednesday.
The capital charge is one of a set of proposals drawn up by the International Association of Insurance Supervisors aimed at curbing the knock-on effects of “systemically important” insurers collapsing.
Insurers whose failure would pose a threat to the wider economy should also be subject to closer scrutiny by regulators, and should put in place detailed plans for winding themselves down in the event they fail, the IAIS said.
The proposals form part of an effort by the G20 group of countries to draw up rules aimed at preventing repeat of the 2008 crisis, when close links between financial institutions triggered a wave of failures, prompting costly government bailouts.
Insurers argue they should escape an across-the-board capital hike of the kind that has been imposed on banks, arguing they are less risky because they do not lend and their customers cannot withdraw cash overnight.
The proposed extra capital charge would likely be targeted at companies involved in risky non-insurance activities, but some with close interconnections to financial markets could also be affected, Peter Braumuller, chair of the IAIS executive committee, told reporters.
Regulators’ focus on insurers’ non-traditional activities stems from heavy losses absorbed by Swiss Re and AIG through credit default swaps which forced both to raise emergency funding during the 2008 crisis.
Austria’s financial market regulator on Wednesday banned insurers from issuing credit default swaps, securities which protect lenders from non-payment, in an effort to prevent them running risks that could harm customers.
The Financial Stability Board, the G20’s regulatory task force, is expected to publish a list of systemically important insurers next year which could include major global players such as Allianz, Axa and Prudential.