'Global systemically important insurers' set new capital requirements

Out-Law News | 08 Oct 2015 | 10:30 am | 2 min. read

Some of the world's biggest insurance companies will have to hold greater amounts of capital in reserve from 2019 under plans detailed on Monday.

The International Association of Insurance Supervisors (IAIS) said the development of the 'Higher Loss Absorbency' (HLA) requirement would help minimise the risk of 'global systemically important insurers' (GSIIs) running into financial difficulty and threatening the wider economy.

A formula has been developed to help GSIIs work out what their capital requirements are. The HLA accounts for GSIIs' group operations and applies effectively a buffer level of capital on top of basic capital requirements (BCRs) the companies have to adhere to. The precise amount of capital each GSII will need to keep in reserve will be dependent on their exposure to risk.

"When the HLA is implemented in 2019, all G-SIIs will be expected to hold regulatory capital that is not less than the sum of the required capital amounts from the BCR and the HLA," the IAIS said.

"The HLA was designed so that, on average, G-SIIs will then hold higher regulatory capital requirements than would be the case if they were not designated as G-SIIs," it said.

GSIIs are defined as "institutions of such size, market importance, and global interconnectedness that their distress or failure would cause significant dislocation in the global financial system and adverse economic consequences across a range of countries".

Currently there are nine companies designated as GSIIs by the Financial Stability Board (FSB), an international body linked to the G20 which is chaired by Bank of England governor Mark Carney. The FSB promotes financial stability through, among other things, seeking to coordinate the efforts of financial regulators across the world. Allianz, AIG and Aviva are among the nine GSIIs.

"A benign record in the past does not ensure the absence of a systemic risk potential in the future," the IAIS said. "The potential for systemic risk in insurance may become relevant where insurers significantly deviate from the traditional insurance business model and particularly where they engage in non-traditional insurance or non-insurance (NTNI) activities or as a result of interconnectedness."

"The development of the HLA is the second step of a long-term project to develop risk-based, group-wide global insurance capital standards," the IAIS said. "The first step was the development of BCR requirements in 2014. The third step is the development of a risk-based group-wide global Insurance Capital Standard (ICS), due to be adopted by the end of 2019."

Insurance regulation expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, said: “These new rules came from the FSB’s plan to prevent taxpayer bailouts of the insurance industry when in a crisis, following the public rescue of AIG in the US during 2007-2008 after AIG’s foray into non-insurance activities involving risky credit default swaps. The new rules will apply to Britain's Aviva and Prudential from 2019.”

“The current nine GSIIs, whose collapse could wreak havoc in global markets, omit a few other notable candidates and the FSB is due next month to update its list of insurers deemed to be systemically important. The result of that review may not be known until next year but more insurers could be caught by this regime,” he said.

Geiringer said that whilst the current nine GSIIs all have healthy surpluses and that they will not have to make public their extra capital buffer until 2019, the new rules will “put pressure on insurers to maintain a very thick buffer of capital above their minimum requirements”.

“This in turn will put added pressure on these insurers’ management teams to use their capital wisely and it may be quite difficult to invest the surplus capital and achieve profitable growth in a low growth business environment as the world’s economy slows down,” he said. “It is therefore no wonder these insurers are dismayed by these new rules and say that the national rules, and those arising from the EU Solvency II Directive in 2016, are adequate and insurers don't pose risks in the same way as banks. We will certainly see these insurers lobbying hard until the G20 finalises the rules and formally endorses them next month at a summit in Turkey.”