31 May 2012

IAIS: Global systematically important insurers - Proposed assessment methodology

The International Association of Insurance Supervisors (IAIS) released its proposed assessment methodology for the identification of global systemically important insurers, or G-SIIs.

The paper was endorsed for consultation by the Financial Stability Board (FSB), which is coordinating the overall set of measures to reduce the moral hazard posed by global systemically important financial institutions. Supervisors, insurers and other interested parties are encouraged to submit comments on the proposed methodology through 31 July.

“This proposed methodology results from intensive and thorough discussion within the IAIS based on the expertise from supervisors around the world”, said Peter Braumüller, Chair of the IAIS Executive Committee. “Based on a recommendation by the G20 Leaders and the Financial Stability Board, the IAIS has accomplished an important piece of financial sector reform.”

The IAIS has proposed an indicator-based assessment methodology similar to the Basel Committee’s approach to identifying global systemically important banks, with several important differences reflecting particularities of the insurance business model. The IAIS’ proposed assessment methodology involves three steps – the collection of data, an indicator-based assessment of the data, and a process of supervisory judgement and validation, with 18 indicators under 5 categories: size, global activity, interconnectedness, non-traditional insurance and non-insurance activities, and substitutability.

In developing the insurer-specific proposed methodology, the IAIS took account of its November 2011 report, 'Insurance and Financial Stability', which concluded that there is little evidence that traditional insurance either generates or amplifies systemic risk within the financial system or in the real economy. As Mr Braumüller explained: “The potential for systemic risk within the insurance sector needs to be considered where insurers deviate from the traditional insurance business model, and more particularly where they enter into non-traditional insurance or non-insurance activities”. Accordingly, in determining an insurer’s relative score, the IAIS has proposed significantly higher weights for the non-traditional and non-insurance activities and interconnectedness categories.

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