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Resilience of the EU financial sector in the global context - Systemic risks in the insurance sector: key outcomes of the IAIS consultations
A better path forward
By Cox Graham - Executive Vice President, Global Risk Management, Metlife
In September 2015, MetLife penned an article for Eurofi Magazine entitled “The Road Not Taken” that highlighted the benefits of an activities-based approach to designation of global systemically important insurers (G-SIIs). That road still remains untraveled and recently proposed amendments to the IAIS G-SII assessment methodology do not address the fundamental problems that result in unsubstantiated designations.
MetLife maintains its view that an activities-focused designation, coupled with industry-wide supervisory measures, is the best way to address potential systemic exposure. However, in the spirit of constructive engagement, MetLife partnered with Oliver Wyman in a thorough review of the G-SII assessment methodology and developed a response to the International Association of Insurance Supervisors’ (IAIS) November 2015 public consultation.
The result is an approach that separates analysis of impact of failure from analysis of probability of failure. It also gives companies credit for good risk management practices that are objectively recognized as reducing systemic impact. The proposal also calls for absolute (not relative) scoring and added transparency so that firms would know why they were designated. In addition, the proposal states that firms should be provided with steps they could take to pursue de-designation.
• Adjusts the quantitative criteria in the G-SII assessment methodology to align with systemic risk transmission channels using an impact of failure analysis.
• Incorporates into the quantitative analysis product and balance sheet risk management tools that can eliminate or reduce systemic impact and that can be measured on an objective, numerical basis; this would reward firms with good practices while providing incentives for others to improve.
• Calls for confidential release to G-SIIs of scores and the “cut off” calculation that defines firms as systemically important.
• Supports a qualitative analysis to supplement quantitative outcomes, including a vulnerability analysis to further consider exposures highlighted by the assessment process.
MetLife suggests its proposal lays a solid foundation for a better path forward.
MetLife’s proposal would also remedy the flawed concept of NTNI. As the IAIS proxy for systemic risk and focus for additional capital, NTNI has long been a key issue. Specifically, the 2013 NTNI proposal mixed products and risk management activities, confused vulnerability and impact of failure analysis. It was also biased against US products.
The 2015 revised framework introduces an analytical approach to the definition of NTNI, but continues to confuse probability of failure and impact of failure analysis. MetLife’s proposal links NTNI indicators to systemic risk transmission channels in a revised interconnectedness category and new asset liquidation category. This proposal eliminates the need for a separate NTNI category and cures the above-described problems.
For these reasons, MetLife suggests its proposal lays a solid foundation for a better path forward.