29 May 2014

Risk.net: Systemic insurers to delay structural reform

According to guidance published by the International Association of Insurance Supervisors (IAIS), insurers must set out in their SRMPs the basis of recovery and liquidity plans. Firms have discretion on whether to unveil plans to discontinue, sell or separate non-traditional and non-insurance activities (NTNI) from the rest of the business.

But the documents are likely to be kept vague at least at an early stage, experts say, adding that SRMPs will likely be reviewed as regulators stabilise the fine details of the regulatory framework being developed for global systemically important insurers (G-Siis).

The uncertainty about the capital implications for insurers carrying out NTNI activities, a concept that will apply to business units selling variable annuities, is one of the main reasons.

"The concept of HLA is not sufficiently clear for us to take decisions based on it," says an insurance executive at one of the European G-Siis. "It is not only about the formula of calculation, but also the extent to which it applies beyond NTNI."

In addition, firms may wish to delay strategic decisions until they have developed their liquidity and recovery plans and supervisors have agreed on a resolution plan. This is scheduled for the end of the year, says Victoria Sander, partner at Linklaters, a law firm, in London.

The resolution plan, which is determined by supervisors in particular, can have profound consequences on the structure of the business, depending on the approach that is decided on. Resolution can take the form of a single point of entry approach, in which the resolution powers are applied at the top of a group by a single national resolution authority. Shareholders and creditors at that level incur losses and capital flows down to keep regulated subsidiaries solvent.

Alternatively, supervisors might decide upon a multiple point of entry approach, in which resolution tools are applied to different parts of the group by the respective resolution authorities, acting in coordination. In turn, this might require firms to ring-fence specific parts of the business.

IAIS

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