03 October 2013

Risk.net: Systemic risk definition for insurers flawed, says former IAIS counsellor

Insurance standard-setters should have developed a more sophisticated definition of activities that cause systemic risk in their assessment methodology for identifying G-SIIs, says a former economic counsellor at the IAIS.

Daniel Hoffman, now adviser to the chairman of Zurich Insurance Group, told delegates at the Insurance Risk Europe conference that more time should have been spent differentiating between systemic risk and systematic risk within insurance groups. Insurers, Hoffman said, had proved to be highly resilient to these systematic risks during the financial crisis, thanks to their long-term investment strategy and liability profile.

But Jeroen Brinkhoff, an economist with the European Systemic Risk Board (ESRB), warned that insurers' investment management actions could pose systemic risk by stoking asset bubbles, citing the preponderance of European firms that had invested heavily in the sovereign debt of their domicile as an example. Insurers' actions, he said, could also have "information contagion" effects, whereby a rapid sell-off of one type of asset by a firm could cause a wider run on that asset by other financial institutions, he said.

The IAIS's definition of non-traditional insurance, an important part of the G-SII assessment methodology, is here to stay, said Hoffman. The current definition, which encompasses activities such as the selling of variable annuities with guarantees, has been contested by the industry.

But the process of determining what counts as a non-traditional activity was difficult for the IAIS, because national supervisors had different views on what limits should be placed on the definition, said Brinkhoff. He maintained international acceptance of the IAIS's definition was important to avoid a "race to the bottom" and an unfair playing field between jurisdictions.

The scale of a country's financial sector compared to the rest of its economy would also be taken into consideration, Brinkhoff added. A single entity holding a significant proportion of a country's insurance liabilities would also be eligible for D-SII status if it was unclear whether a substitute firm could be drafted in to take over its policyholder obligations.

Capital requirements for G-SIIs have caused much confusion amongst industry players. It is not yet clear how the IAIS's higher loss absorbency (HLA) will apply to designated firms.

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