Inclusion on List of Too-Big-to-Fail Insurers May Alter Business Strategy: Fitch

A change to the list of globally systemically important insurers (G-SIIs) suggests the potential for being added to or removed from the list could play a significant role in setting strategy for some major insurers, according to Fitch Ratings.

The list was first published in 2013 and was unchanged last year, but on Nov. 3 the Financial Stability Board (FSB) removed Generali and added Aegon.

The FSB did not explain why it made the switch, but, Fitch said, it could have been driven by changes in both firms’ exposure to non-traditional and non-insurance business.

Generali in September sold its Swiss private banking arm, BSI, to BTG Pactual, which Fitch said “significantly reduced its exposure to banking.”

“At the same time, Aegon has increased its exposure to variable annuities, a non-traditional product with embedded options and guarantees that we believe give rise to risks that are complex, long-tailed, and difficult to price, hedge and reserve for,” Fitch continued.

Inclusion on the list means companies must hold more capital, face closer regulatory scrutiny and develop recovery and resolution plans, the ratings agency explained.

While higher capital is generally positive for insurers’ credit profiles, it also could put them at a competitive disadvantage, Fitch maintained.

“This creates an incentive for insurers to avoid being designated as a G-SII and could lead to them disposing of operations that might be considered non-traditional or avoiding any increase in their exposure in this area,” Fitch continued.

This would only be a consideration for insurers that are “on the cusp of joining the list or those already on it that only have limited exposure to non-traditional business.”

Under the proposed rules, G-SIIs will be placed into one of three “buckets,” based on their systemic importance, which will determine how much extra capital they have to hold, Fitch said.

“We expect firms with limited exposure to non-traditional business, such as Aviva and Allianz, to be in the lowest risk bucket,” Fitch said. “European G-SIIs Prudential Plc and AXA, along with MetLife, Prudential Financial and possibly AIG are likely to end up in the middle bucket because of their larger volumes of non-traditional business. These insurers could find it much harder to get rid of their G-SII designation.”

The International Association of Insurance Supervisors is soon to publish to consultation documents, which will likely provide more clarity on what is considered “non-traditional business” as well as the methodology used, Fitch said.

Source: Fitch Ratings