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The Financial Stability Board (FSB) is currently considering which insurers to include in the new regime and was expected to publish a list in April. However, the publication of the list has been delayed, possibly until the summer. Once designated, insurers could face higher capital charges when the new rules are implemented in 2019. They may also have to ring-fence non-traditional insurance activities and will be required to write 'living wills' that will make them easier to close in any future crisis.
G20 leaders first mooted the introduction of systemic regulation as part of a package of measures aimed at avoiding a repeat of the financial crisis. The concept has been taken on by the FSB, which has already designated some 28 banks as systemically important. The FSB is now working with the International Association of Insurance Supervisors (IAIS) on a comparable regime for insurers.
Insurance industry lobbying had persuaded the IAIS that traditional insurance does not pose a systemic risk, however the FSB has erred on the side of caution and is pushing ahead with plans to include insurers within the scope of its new systemic regulations. The industry has been lobbying to stay beyond the scope of systemic regulation, arguing that their business model and size relative to the banks does not propose a systemic risk. Now resigned to some sort of systemic regulation, industry lobbying has turned to its concerns over the selection criteria and policy measures, which are still to be set.
Insurers believe that the criteria for selecting GSIIs and the likely policy responses are still too heavily based on those designed for the banks. They also argue that an insurer's size and global reach is not a driver for systemic risk. In contrast, they argue that size and a global spread of business brings much-needed diversification.
The FSB and IAIS, conscious of the need to bail out American International Group after it suffered massive losses after investing in credit derivatives, is also looking to capture insurers with non-traditional insurance operations. While investing in credit derivatives poses an obvious systemic risk, other non-traditional areas are less clearcut.
Grey areas include financial guarantee insurance, mortgage guarantee insurance, finite reinsurance, trade credit, variable annuities and insurance-linked securities. There is still much debate over which areas should be considered non-traditional.
The insurance industry is also concerned with the implications of being designated a G-SII. For example, the IAIS is proposing that non-traditional activities-like cat bonds-would have to be ring fenced, a potentially costly measure that could make the more innovative side of insurance unprofitable for some insurers.