The scope of the recently-proposed global standards for the resolution of failing insurers is unclear and could lead to divergent national resolution regimes, experts are warning.
On August 12, the Financial Stability Board (FSB) published a consultation paper on extending the so-called ‘key attributes' of the resolution regime for too-big-to-fail banks to the insurance sector. The Basel-based coordinating body proposes that supervisory authorities be given extended powers to restructure liabilities, suspend policyholder rights, bail-in creditors and force firms to restructure their businesses.
The FSB says the heightened resolution regime should apply to any insurer that "could be systemically significant or critical [to the financial system or the wider economy] if it fails" and not just to those designated as global systemically important insurers (G-SIIs).
But this vague definition is fuelling concerns about the reach of the proposed requirement and the potential for them to be applied inconsistently by national supervisors. The proposals give flexibility to national regulators to apply the rules to large domestic firms that have not been designated GSIIs, according to Clifford Smout, co-head of the Europe, Middle East and Africa centre for regulatory strategy at Deloitte, in London. "The scope of application remains unclear", he says.
Supervisors are likely to initially focus on G-SIIs. The International Association of Insurance Supervisors (IAIS) has already set an deadline of the end of 2014 for the assessment of the recovery and resolution plans of the nine global systemically important insurers designated by the FSB in July this year. "National supervisors will be expected to take a similar approach to domestic systemically important insurers", says Rob Curtis, global regulatory leader for insurance, at financial services firm KPMG in London.
The IAIS is currently developing guidance for identifying domestic insurers that pose systemic risk. This could provide a framework for national authorities, but it may not be enough to ensure consistency of resolution regimes across jurisdictions. "There is a real possibility that the [resolution] standards beneath the GSII [layer] will be different from one jurisdiction to another", says Deloitte's Smout.
The fact that some of the key attributes are set at a very high level together with the diversity of resolution rules across national jurisdictions are likely to contribute to this divergence. National regulators will not only have to identify the gaps in their existing regimes and introduce new powers and tools, but they may also need to review current resolution instruments.
In continental Europe, for instance, there is a wide range of rules for transferring portfolios of liabilities. Some resolutions regimes do not capture the transfer of reinsurance assets, which is something regulators will have to take a closer look at, according to Peter Carter, director of corporate finance restructuring services at Deloitte in London.
In the UK there is currently no resolution regime for insurers, and regulators do not enjoy the same powers they have in relation to banks. "However, this may change in the future, particularly if the European Union endorses the need for it", says Philip Jarvis, partner and insurance group leader at law firm Allen & Overy in London.
Full article (Risk.net subscription required)
© Risk.net
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article