22 October 2013

Risk.net: Insurers may be better off not separating NTNI business, says top lawyer

The costs of separating non-traditional and non-insurance (NTNI) activities from traditional insurance activities may persuade systemically significant insurance groups to leave their structure unchanged despite greater capital requirements, according to a top insurance lawyer.

Firms designated as global systemically important insurers (G-SIIs) will, after 2019, be required to hold an additional regulatory buffer, the so-called high loss-absorption (HLA) capital charge, for their NTNI activities. The HLA charge is expected to encourage groups to separate their NTNI activities as the HLA may be higher if the NTNI business is not adequately separated.

But the capital disadvantages of restructuring business may outweigh the benefit of the reduced HLA that would arise, says Robert Stirling, partner at Freshfields Bruckhaus Deringer, in London. Firms that separate their business will often lose diversification effects on their portfolios. They would also be deprived of other benefits of keeping the businesses together, such as using surpluses to support great investment flexibility.

If separating risky NTNI activity is seen as too costly for insurers, then this would come as a blow to international regulators that are seeking to encourage insurers to mitigate systemic risk by, for instance, separating high-risk business units.

The IAIS is still a long way from outlining the details of the HLA requirement. A final proposal should be put forward in 2017, building on the work recently initiated to develop an industry-wide capital standard for Internationally Active Insurance Groups (IAIGs).

Once there is clarity about the rules, firms will be better able to assess the relative costs of restructuring. The criteria used to identify G-SIIs, despite the heated debate around it, provide more sound clues about the impact of regulation.

Market interconnectedness and the extent of NTNI activities are two key factors in deciding whether a company is systemically significant.

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