Geneva Association Reacts to G20 Insurers’ Capital Mandate

The Geneva Association, the international insurance think tank, issued a bulletin following the publication of both the Financial Stability Board’s (FSB) list of global systemically important insurers (G-SIIs) and the International Association of Insurance Supervisors’ (IAIS) publication of policy measures and consequences to be applied to G-SIIs.

The Association said that it “recognizes the importance of creating a more stable financial system and supports the G20-led efforts to address systemic risk.” It also indicated that its independent research “shows that regulatory and supervisory measures developed should address systemically risky activities (SRAs) only.”

In addition the Association pointed out that the “IAIS acknowledged last summer that traditional insurance and reinsurance do not create or amplify systemic risk. On the contrary, traditional insurance and reinsurance generate financial stability by covering extreme insurance events for society and through long-term investments in assets that support long-term obligations to policyholders.”

Since 2009, the Association has developed a significant body of research on financial stability in insurance and systemic risk. It has examined potential insurance regulatory and supervisory frameworks that would address these issues. Based on this research, The Geneva Association said it has “advocated that an activities-based approach and a clear focus on systemically risky activities be at the heart of the process. The IAIS has reconfirmed the importance of an activities based approach in its recommended consequences and measures.”

Moreover the bulletin noted that the regulations appear to some extent to be based on the size of the companies that are included, and that their size “continues to play a significant role in the designation methodology.”

The Association noted that “while this is rational in addressing the banking industry, the insurance business is based on the law of large numbers – as the number of risks in a portfolio increases, the riskiness of the portfolio decreases. In insurance, size commonly reflects a greater diversification of the lines of business and geographies of an organization, reducing the level of portfolio risk and therefore the potential need for resolution.”

Geneva Association Chairman and the CEO of XL Group Mike McGavick commented: “It is important that the criteria and measurements used to designate a G-SII are made available as soon as possible and are transparent, predictable and measurable. Without a transparent and predictable process it is impossible for management to monitor and manage systemic risk levels.”

John H. Fitzpatrick, Secretary General of the Association said: “The Association’s research suggests that strong lead supervision of an insurance group can be more effective than higher loss absorbency (HLA) in addressing systemic risk. That said, any ‘backstop capital requirement’ needs to be tailored specifically for the insurance business model and care taken to avoid creating new competitive issues.”

The bulletin pointed out that “more work will be needed to refine the process for identifying and dealing with systemic risk in insurance and ensuring consistency with reinsurance. We look forward to working closely with the IAIS and FSB in developing an appropriate framework for comprehensive group supervision that achieves the important objective of creating financial stability.

“We expect to examine the proposal on macro-prudential policy and surveillance in insurance in the coming days. Ultimately, it will also be important for the comparison of systemic risk to be made across the whole financial services industry so that appropriate attention is paid to the largest pockets of systemic risk in the system. The results of the designation process for insurers overstate the importance of the top-ranked insurers compared to other institutions in the financial services industry.

Source: The Geneva Association