27 February 2019

Global Federation of Insurance Associations: IAIS systemic risk proposals must be better defined

To develop an effective holistic framework for systemic risk in the insurance sector, the IAIS must better define systemically risky activities. GFIA encourages a narrow focus on those activities that could cause an impairment of all or parts of the financial system and could have serious negative consequences for the real economy. GFIA also warned that the IAIS’ current proposals are unclear in terms of scope.

GFIA has always argued that traditional insurance is not systemically risky and that an entity-based assessment of systemic risk is inappropriate.

The definition of systemic risk is critical to the determination of activities that can cause systemic risk. Therefore, GFIA encourages a narrow focus on those activities that could cause an “impairment of all or parts of the financial system” and could have “serious negative consequences for the real economy”.

GFIA notes that the IAIS proposes a new framework intending to combine three different approaches:  

• an entity-based approach,
• an activity-based approach (e.g. an aggregated data collection reflecting the insurance sector’s risk per activity with a focus on liquidity risk)
• a cross-sectorial approach based on the comparison of common indicators.

GFIA would emphasise that extending some of the measures that currently only apply to G-SIIs, to a broader portion of the insurance sector means that the idea of proportionality and the consideration of cost and benefits aspects become crucial. The challenge is to define a concrete threshold to identify systemically risky activities that could lead to collective actions and therefore amplify shocks to the rest of the financial system. The threshold must be adequately calibrated to meet the materiality criterion. More specific information about the application of proportionality principles is needed in the consultation draft.

GFIA takes the view that, at this stage, the scope of proposals is very unclear and that it is therefore not easy to determine which insurer may be subject to which policy measure. In considering the scope of the application of policy measures, the IAIS should distinguish between:

• those measures that are reflective of good practice, which should be approached in a proportionate manner given the nature of insurers’ business and very low likelihood of potential contribution towards systemic risk (for example, managing counterparty exposures as part of ERM); and
• those measures with more limited scope, such as resolution, which should only be applied where it can be demonstrated that there are material risks to the global financial system.

GFIA understands the need for data to support an adequate and relevant supervisory process. But GFIA would point out that insurers already have to face very burdensome data collection exercises. Therefore, the IAIS should ensure that its data collection exercise is necessary, proportionate and appropriately justified.

The ICS is incomplete and not fit-for-purpose in its current form, with significant further work needed before it could be considered “final”. Given its preliminary nature, the IAIS should remove all references to the ICS from the Holistic Framework and the ICS should not be used as a basis for supervisory intervention until it is formally implemented as a group-wide PCR.

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