The work is part of a broad effort by the global Financial Stability Board to prevent a repeat of the 2008 financial crisis. While most of the early work focused on banks, the IAIS was charged with coming up with a plan for insurers in the wake of the collapse and government rescue of US insurer AIG.
The FSB – headquartered in Basel, Switzerland – is expected to come up with a list of systemically important insurers by the end of June, based on the size of their non-traditional business, their centrality to the financial system and their size. All of these companies will be subject to tighter supervision and required to write “living wills” that will make them easier to wind down in any future crisis.
Some groups will also be required to carry extra capital to absorb unexpected losses, much like the 28 banks that have been designated globally systemic. But the IAIS has opted to limit these surcharges to a percentage of the groups’ non-traditional non-insurance business, rather than their entire balance sheets.
Insurers that segregate these businesses, which include variable annuities and credit default protection, in separately capitalised legal entities will be hit with lower surcharges than those that mingle their business lines. But the IAIS has moved away from earlier suggestions that it might hit intertwined businesses with across-the-board surcharges.
The decision to impose surcharges only on the non-traditional business is good news for giant insurers that focus primarily on traditional insurance. The IAIS has been considering 48 groups for possible inclusion on the systemic list, but the actual number is expected to be much smaller. Some of the big insurers being considered for the list are Axa, Allianz, Prudential Financial of the US, Legal & General, MetLife and Nippon Life.
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