03 June 2014

Risk.net: Reinsurers challenge enhanced G-Sii assessment

The International Association of Insurance Supervisors (IAIS) recently launched its annual data collection exercise to assist in the identification of global systemically important insurers (G-Siis). The list of G-Siis will be updated in November to include reinsurance companies for the first time.

Last summer, the IAIS explained that the list of G-Sii reinsurers would be postponed to provide more time to investigate the make-up of individual reinsurers, taking into account issues relating to substitutability and interconnectedness that the association said "are more complex than for insurers and require further study and analysis".

But reinsurers say changes in the reinsurance market over the past two years make these two factors unimportant in an assessment of reinsurers' systemic riskiness. Philippe Brahin, managing director at Swiss Re in Zurich, says the influx of alternative capital into the reinsurance space in the form of catastrophe bonds, sidecars and collateralised reinsurance has rendered the substitutability argument moot.

Brahin also believes the view that reinsurers are more interconnected with the wider financial system than primary insurers has been overstated. "The IAIS took the view that insurance companies used reinsurance to essentially raise their level of operational funding. We had to explain that this is not the case, that we do not provide inter-sector funding, but risk management and capital relief. We hope our message has been received and that interconnectedness will not feature any more prominently in the designation of reinsurers than it does for primary insurers", he adds.

However, the IAIS has not yet signalled a change in position. "As we stated last year, for reinsurers the issues relating to substitutability and interconnectedness are more complex than for insurers and require further study and analysis. Additional time is also needed to identify policy measures that are targeted to mitigating financial stability risks associated with the major reinsurers' business models", says Yoshi Kawai, secretary-general of the IAIS in Basel.

The list of reinsurance G-Siis was expected to be released in July this year. In May, the Financial Stability Board (FSB), which together with the IAIS is leading the G-Sii process, announced that the list would be pushed back to November. The IAIS says this is to guarantee that reinsurers are assessed based on its latest data collection exercise, and to coordinate the publication of the list with those of primary insurance G-Siis and global systemically important banks.

The industry's expectation is that there will be few, if any, reinsurers added to the list of G-Siis in November. But, because the process is driven by the Group of 20 (G-20) nations through the FSB rather than by insurance regulators themselves, firms fear they could be designated for political rather than practical reasons. "We hope the IAIS and FSB will stick to the facts, but the pressure from the G-20 may transform the process into a political exercise", says Brahin.

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