17 December 2012

Geneva Association Response on IAIS Policy Measures and Consequences Consultation

Leading international insurance think tank, The Geneva Association, published its response to the International Association of Insurance Supervisors' public consultation, 'Proposed Policy Measures for Global Systemically Important Insurers'.

The response is the latest publication in a series of research papers and commentary on financial stability and insurance from The Geneva Association.

“Developing and promoting effective regulatory, supervisory and other financial sector policies to improve financial stability and address information gaps is vital to ensure the smooth functioning of the global financial sector”, said John H Fitzpatrick, Secretary General and Managing Director of The Geneva Association.

The Geneva Association suggests three steps for applying appropriate policy measures to insurers in an escalating “ladder of intervention”.

• First, positively identify, and explain the rationale for selecting the non-traditional, non-insurance (NTNI) activities that are Systemically Relevant (SRAs), and consider whether the insurance group can appropriately handle the SRA through its internal processes, risk governance and capital position.
• The second step would be to ensure that the SRA is carefully considered and that it would not impact the group’s insurance activities.
• The third step would ensure that the company’s liabilities and capital for all SRAs address all material categories of risk associated with that activity.

The recent release of shadow banking consultation papers by the Financial Stability Board (FSB) may be a useful basis to fine tune the identification of non-insurance SRAs. In the paper, the FSB provides guidance to focus on activities involving maturity/liquidity transformation, imperfect credit risk transfer, leverage, and regulatory arbitrage concerns. These activities have the potential to lead to bank-like activities involving maturity/liquidity transformation, creating money - like liabilities or leverage, the key triggers of systemic risk events, as they can create immediate liquidity needs. The Geneva Association, in its research, identified and called the activities that have these characteristics potentially systemic risky activities (pSRAs).

Daniel Haefeli, Head of Insurance and Finance at The Geneva Association, said: “The Geneva Association does not support group-wide HLA which is not an appropriate tool to manage systemic risk in insurance and is counterproductive for insurance from a macro-economic, micro-economic and business model perspective. Insurers have technical provisions/reserving - which is the case for all insurance activities, both traditional and non-traditional. This must be considered before applying any HLA to a sector whose role it is to absorb loss and risk, and to protect capital.”

Press release

Full consultation response

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