02 July 2013

Risk.net: Reinsurers question separation of systemic risk designations

The Financial Stability Board (FSB) announced last week that the decision on which reinsurers would be designated as G-SIIs, and the policy measures that will apply to them, will not be made until July 2014. There will now be one list and package of G-SII measures for insurers – which will be published later this month – and a separate list and package for reinsurers.

Such a move had not been indicated in previous discussions on the designation process. No explanation was given for the surprise decision by the FSB or the International Association for Insurance Supervisors (IAIS), which is developing the policy measures for G-SIIs.

Philippe Brahin, head of governmental affairs and sustainability at Swiss Re in Zurich, suggests the decision may have been driven by divisions in the IAIS. "The question is: why have they put aside the reinsurers for now? It may be that IAIS members had opposing arguments. Maybe some major reinsurers didn't provide the level of information the IAIS was looking for."

It is possible, suggests Brahin, that the IAIS has decided reinsurers will require a different assessment methodology to determine whether they pose a systemic risk to the financial system because their risk profile is different from primary insurers. Clashes between regulators could also have led to the decision to separate the lists, he suggests.

In last week's announcement, the FSB specified that the IAIS would "develop straightforward, backstop capital requirements to apply to all group activities, including non-insurance subsidiaries". These would be finalised by the time of the G-20 summit in 2014 and be a first step towards implementing a higher loss-absorbency (HLA) requirement for G-SIIs, the FSB said.

Proposed policy measures for G-SIIs, published by the IAIS in October 2012, described a "cascading approach" to HLA whereby additional capital requirements would be applied in the first instance to non-traditional non-insurance activities (NTNIA).

The onus is now on the industry to engage with the IAIS and FSB constructively as the G-SII process enters its final stages, Brahin says. "The industry has now a chance to be even more proactive in engaging with the IAIS on the definition of NTNIA, and be more proactive in responding to the IAIS taskforce to develop group capital standards; then maybe they will roll out something more tailored to our economic reality instead of a blanket group-wide capital surcharge. The way it reads right now it's not a good outcome", he adds.

Full article (Risk.net subscription required)

FSB-press release, 25.6.13

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