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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

Global systemically important insurers

By Saporta Victoria - Chair of the Executive Committee, The International Association of Insurance Supervisors (IAIS)

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This is an important year for the IAIS in its role as global standard setter contributing to financial stability in the insurance sector. At the end of this year, the FSB will designate the 2016 G-SIIs based on the IAIS’s revised methodology. This article sets out some background, a brief status report and some next steps.

Background

Since the financial crisis, supervisors across sectors, coordinated by the FSB, have worked diligently to address risks to the global financial system. In July 2013 the IAIS developed an initial assessment methodology, endorsed by the FSB, to identify insurance-dominated financial conglomerates whose distress or disorderly failure, because of their size, complexity and interconnectedness, would cause significant disruption to the global financial system and economic activity. It also published a list of 9 initial G-SIIs, and committed to review the methodology every three years. Designation as a G-SII has important consequences for firms, including requirements for recovery and resolution planning, enhanced-group wide supervision and the holding of Higher Loss Absorbency (HLA) capital from 2019 onwards.

The notion of non-traditional non-insurance (NTNI) activities and products forms an integral aspect of the designation methodology as well as in setting the level of the HLA capital charge (and the Basic Capital Requirement on which the HLA is based). Industry has sought clarification on the three principles introduced in 2013 to guide the determination of NTNI products. This is the reason why in 2015 the IAIS launched a review into the NTNI concept and its application. Simultaneously, the IAIS started a review of the methodology as a whole. A key component of both reviews was a public consultation in November 2015.

NTNI Consultation

The IAIS stated that most insurance products or activities are unlikely to create or contribute to systemic risk. Nevertheless, a subset of insurance products can create substantial and correlated exposure to the market or leave the insurance vulnerable to “run-like” liquidity risk. These vulnerabilities, in turn, can transmit to the rest of the financial system in the event of an insurer’s failure.

The NTNI consultation document introduces a framework that aims to help supervisors identify this subset of “non-traditional” features. The framework sets out two different channels through which vulnerabilities introduced by specific product features could transmit to the rest of the system in the event of an insurer’s failure: asset liquidation and an exposure channel.

G-SII Methodology Consultation

The objective of the G-SII Methodology review is to improve the methodology building on three years of experience in using it while ensuring it is fit for purpose for the various insurance business models (primary insurers, reinsurers and financial guarantors).

Key proposals put forward for consultation include the introduction of an additional assessment phase allowing for additional analysis of insurers to better understand the heterogeneous nature of their business models and products. Furthermore, the IAIS has proposed to introduce absolute reference values for selected indicators within the methodology in order to reflect changes in the overall systemic risk posed by the global insurance industry.

Consultation process

Both the G-SII Methodology and NTNI review proposals were put out for public consultation in November 2015 and stakeholders were invited to provide feedback by the end of January 2016. The IAIS received a total of 35 and 28 responses for the G-SII and NTNI consultations respectively. A stakeholder event in January was attended by 114 individuals. The feedback received forms a key input in the finalisation of the methodology and NTNI review, and the IAIS will provide detailed explanations on how it resolved and addressed stakeholder comments and suggestions.

Next steps and conclusion

The IAIS is in the process of finalising both reviews. The data exercise that informs the G-SII assessment will be launched in April 2016, with 50 firms expected to participate and the FSB will decide on the 2016 G-SII list in November based on the IAIS’s recommendations. At that stage of the journey, the IAIS would have crossed a key milestone in its contribution to global financial stability.