02 November 2012

Risk.net: Loss-absorption proposals for systemically important insurers flawed

The International Association of Insurance Supervisors (IAIS) is consulting on policy measures to reduce the risk of G-SIIs harming the global financial system in the event that one collapses.

The IAIS proposes that G-SIIs should hold additional capital, a so-called higher loss-absorption (HLA) capacity, to insulate against low-probability and high-impact shocks. Other proposed measures outlined in its consultation paper include enhanced supervision and effective resolution procedures in the event of firm failure.

Two methods of overlaying the HLA on top of local regulatory requirements are proposed by the IAIS. The first method would calculate the required uplift as a percentage of local solvency standards, using the measurement that is closest to the IAIS's own prescribed solvency ratio.

The second method put forward by the IAIS would define the HLA as a percentage of a firm's total balance sheet, including off-balance-sheet positions, but excluding capital.

However, consultants say both methods have flaws that would generate uneven results across jurisdictions as there is no single, international solvency standard for insurers.

Jan-Hendrik Erasmus, a partner in consultancy Oliver Wyman's financial services practice, says: “The lack of a global capital standard means the HLA buffer could be applied differently depending on the accounting mechanisms used by local supervisors. Some use International Financial Reporting Standards as the basis of calculation, while others use US generally accepted accounting principles (GAAP).”

The consultation is also unclear on how additional capital to meet the HLA buffer will be funded, say analysts.

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IAIS-GSII Policy Measures

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