On 18 July 2013, the Financial Stability Board (FSB) published a press release endorsing the assessment methodology and policy measures published by the International Association of Insurance Supervisors (IAIS) discussed below, and naming the first nine globally systemically important Insurers (G-SIIs). The list will be published each November, starting in 2014 and initially comprises:
- Allianz SE;
- American International Group, Inc.;
- Assicurazioni Generali S.p.A.;
- Aviva plc;
- Axa S.A.;
- MetLife, Inc.;
- Ping An Insurance (Group) Company of China, Ltd.;
- Prudential Financial, Inc.; and
- Prudential plc.
On the same date the IAIS announced that it had published:
- a G-SII Initial Assessment Methodology;
- G-SII specific policy measures, and
- an overall G-SII framework for macroprudential policy and surveillance.
G-SII Initial Assessment Methodology
The methodology (which has already been criticised as being “opaque and arbitrary” on account of the fact that it contains no quantitative cut-off point for G-SII designation, preventing firms from knowing what actions would help them remain below the G-SII threshold) is designed to assess the systemic importance of insurers, using year-end 2011 data collected from selected insurers in 2012 and employing a three-step process involving:
- the collection of data;
- a methodical assessment based on five weighted categories and 20 indicators;
- non-traditional insurance and non-insurance (NTNI) activities (45% weighting);
- interconnectedness (40% weighting);
- substitutability (5% weighting);
- size (5% weighting); and
- global activity (5% weighting); and
- a supervisory judgment and validation process.
G-SII Policy Measures
The IAIS policy framework for G-SIIs is three-pronged, consisting of:
These measures entail the development of Systemic Risk Management Plans, enhanced liquidity planning and management and the granting of direct powers over holding companies to group-wide supervisors. There is also a reasonably detailed discussion of:
- the nature of traditional insurance versus NTNI activities; and
- effective separation of NTNI business.
Traditional versus NTNI Insurance
Traditional Insurance is broadly characterised by insured events which are accidental in nature, random in occurrence and subject to the law of large numbers. In contrast, NTNI broadly includes activities that are more financially complex than traditional insurance, where liabilities are significantly correlated with financial market outcomes (such as stock prices, and the economic business cycle) and have financial features such as leverage, liquidity or maturity transformation, imperfect transfer of credit risks, (i.e.“shadow banking”), credit guarantees or minimum financial guarantees.
Effective separation of NTNI
Whether NTNI activities are effectively separated goes to the heart of G-SII resolvability and the amount of Higher Loss Absorption (HLA) to be applied to a G-SII. The following conditions are relevant in this determination:
- Self-sufficiency: an effectively separated entity will be able to operate without the support of parent or affiliates;
- Operational independence of management;
- Regulated status: the effective separation of NTNI activities must not result in a non-regulated financial entity;
- Arm’s length dealings: any intragroup transactions or commitments with the separated NTNI entities must be executed “at arm’s length”; and
- Reputation risk: the risk that a parent or affiliate provides financial support to an entity even though there is no legal obligation to do so must be limited.
The IAIS’s proposals for the effective resolution of G-SIIs are based on the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions but takes account of the specificities of insurance. This entails the establishment of Crisis Management Groups, the development of recovery and resolution plans (RRPs), the conduct of resolvability assessments, and the adoption of institution-specific cross-border cooperation agreements.
Higher Loss Absorption Capacity
G-SIIs will be required to have HLA capacity. This may only be met by “highest quality capital”, being permanent capital that is fully available to cover losses of the insurer at all times on a going-concern and a wind-up basis. In applying this requirement a distinction may be made based upon whether a firm’s NTNI activities have been effectively separated from traditional insurance business. HLA may be targeted at the entities where systemically important actives are located and also take account of whether group supervisors have authority over any non-regulated financial subsidiaries.
Report on Macroprudential Policy and Surveillance in Insurance
In addition to the microprudential supervision measures constituting the G-SII Policy Measures, the IAIS also released a framework for implementing macroprudential policy and surveillance (MPS) in the insurance sector, designed to maintain 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. Over time, the MPS framework will be refined through the issuance of guidance on the practical application of IAIS Insurance Core Principles, and the development of a toolkit and data template regarding early warning risk measures.
Key implementation dates are as detailed below:
|Implementation of enhanced supervision for G-SIIs
|FSB to designate the initial cohort of G-SIIs based on the IAIS methodology
|For designated G-SIIs, implementation commences of resolution planning and resolvability assessment requirements
|IAIS to prepare a workplan to develop a comprehensive, group-wide supervisory and regulatory framework for internationally active insurance groups (IAIGs)
|Finalisation of IAIG framework
|Systemic Risk Management Plan (SRMP) to be completed
|Crisis management groups (CMGs) to be established for initial set of G-SIIs
|G-SII designation of major reinsurers
|IAIS to develop straightforward, backstop capital requirements to apply to all group activities, including non-insurance subsidiaries
|CMGs to develop and agree RRPs, including liquidity risk management plans for initial set of G-SIIs
|IAIS to develop implementation details for HLA that will apply to designated G-SIIs starting from 2019
|Implementation of SRMPs to be assessed
|FSB to designate the set of G-SIIs, based on the IAIS methodology and 2016 data, for which the HLA policy measure will apply, with implementation beginning in 2019
|HLA requirements to apply to those G-SIIs identified in November 2017