IAIS Releases G-SII assessment methodology and policy measures, macro-prudential policy and surveillance framework

18 July 2013

The International Association of Insurance Supervisors released its assessment methodology and policy measures for global systemically important insurers, or G-SIIs, as well as an overall framework for macro-prudential policy and surveillance.

The assessment methodology and policy measures were endorsed by the Financial Stability Board (FSB), which is coordinating global efforts to reduce the moral hazard posed by global systemically important financial institutions, or G-SIFIs.

“Since the financial crisis, supervisors across the sector have worked diligently to address risks to the global financial system from systemically important financial institutions or SIFIs and macroprudential shocks”, said Peter Braumüller, Chair of the IAIS Executive Committee. “The measures and framework put forth by the IAIS today complete a major piece of this reform in a manner specifically designed for the insurance sector.”

G-SIIs: Initial Assessment Methodology

The IAIS has developed an initial assessment methodology to assess the systemic importance of insurers and applied that methodology using year-end 2011 data collected from selected insurers in 2012. The initial assessment methodology involves three steps: the collection of data, a methodical assessment of that data and a supervisory judgment and validation process.

The indicator-based assessment approach is related to the approach developed by the Basel Committee for global systemically important banks, or G-SIBs. However, the specific nature of the insurance sector, as described in the seminal IAIS report Insurance and Financial Stability, has influenced the selection, grouping and weights assigned to certain indicators. The IAIS’ assessment methodology identifies five categories to measure relative systemic importance: non-traditional insurance and non-insurance (NTNI) activities, interconnectedness, substitutability, size and global activity. Within these five categories are 20 indicators, including: intra-financial assets and liabilities, gross notional amount of derivatives, Level 3 assets, non-policyholder liabilities and non-insurance revenues, derivatives trading, short term funding and variable insurance products with minimum guarantees.

G-SIIs: Policy Measures

The IAIS has developed a framework of policy measures for G-SIIs based upon the general framework published by the FSB with adjustments that, as with the proposed assessment methodology, reflect the factors that make insurers different from other financial institutions. The proposal consists of three main types of measures:

• Enhanced Supervision. These measures build on the IAIS Insurance Core Principles and the FSB’s Supervisory Intensity and Effectiveness recommendations and include the development of a Systemic Risk Management Plan and enhanced liquidity planning and management. They also require the group-wide supervisor to have direct powers over holding companies to ensure that a direct approach to consolidated and group-wide supervision can be applied.
• Effective Resolution. Based on the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions, these measures include the establishment of Crisis Management Groups, the elaboration of recovery and resolution plans, the conduct of resolvability assessments, and the adoption of institution-specific cross-border cooperation agreements. The IAIS proposals take account of the specificities of insurance through the inclusion of plans for separating NTNI activities from traditional insurance activities, the potential use of portfolio transfers and run-off arrangements, and the recognition of existing policyholder protection and guarantee schemes.
• Higher Loss Absorption (HLA) Capacity. As a foundation for HLA requirements for G-SIIs, the IAIS will as a first step develop straightforward, backstop capital requirements to apply to all group activities, including non-insurance subsidiaries, to be finalised by the end of 2014.

Macro-prudential Policy and Surveillance (MPS) in Insurance

In addition to the measures to identify and address G-SIIs, the IAIS has also released its framework for implementing macroprudential policy and surveillance (MPS) in the insurance sector. In contrast to microprudential supervision, which is concerned with the viability of individual institutions, MPS takes a market-wide perspective with a view to maintaining financial stability. Its focus is on enhancing the supervisory capacity to identify, assess and mitigate macro-financial vulnerabilities that could lead to severe and wide-spread financial risk.

Press release

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