On 17 October 2012, the International Association of Insurance Supervisors (IAIS) published a consultation document relating to proposed policy measures for global systemically important insurers (G-SIIs) i.e. insurers whose distress or disorderly failure would cause significant disruption to the global financial system.
The consultation remains open until 16 December 2012 and details policy measures designed to reduce the probability and impact of G-SII failure as well as to incentivise G-SIIs to become less systemically important and non G-SIIs not to become G-SIIs. The policy measures are broken down into three main categories:
- Enhanced supervision;
- Effective resolution; and
- Higher loss absorption (“HLA”) capacity.
Non-traditional and non-insurance (NTNI) activities of G-SIIs, such as derivates trading, are regarded as particular sources of systemic risk. Within most G-SIIs, NTNI activities are carried out within separate group companies. As such, it is necessary for supervisors of G-SIIs to have group-wide supervision powers. Within this context, enhanced supervision will take the form of:
- Enhanced liquidity planning and management; and
- Systemic Risk Reduction Plans.
Enhanced Liquidity Planning and Management
G-SIIs will be required to have adequate arrangements in place to manage group liquidity risk, primarily in relation to NTNI activities and channels of interconnectedness.
Systemic Risk Reduction Plan
In addition to maintaining recovery and resolution plans (RRPs), G-SIIs will be required to develop Systemic Risk Reduction Plans (SRRP). The purpose of an SRRP is to shield traditional insurance business from NTNI business (and vice versa), reduce the systemic importance of the G-SII and improve resolvability. Where appropriate, an SRRP should include ex-ante measures to ensure the effective separation of systemically important NTNI activities from traditional insurance business into standalone, regulated entities. GSIIs must ensure that any entities created as a result of this process do not benefit from subsidies in the form of capital and/or funding and are:
- Structurally self-sufficient: meaning that the entity could be liquidated without impacting the remaining group and that intra-group transactions such as guarantees and cross-default clauses are either prohibited or at a minimum adequately monitored and restricted; and
- Financially self-sufficient: meaning that the entities in question are adequately capitalised.
In addition, the following specific policy measures should be considered:
- Direct prohibition or limitation of systemically important activities;
- Requirements for prior approval of transactions that fund or support systemically important activities;
- Requirements for spreading or dispersing risks relating to systemically important activities; and
- Limiting or restricting diversification benefits between traditional insurance business and other businesses.
The FSB’s “Key Attributes of Effective Resolution Regimes for Financial Institutions” (Key Attributes) details the specific resolution requirements for all G-SIFIs and forms the basis for improving G-SII resolvability. These requirements include:
- The establishment of Crisis Management Groups (CMGs);
- The elaboration of recovery and resolution plans (RRPs);
- The conduct of resolvability assessments; and
- The adoption of institution-specific cross-border cooperation agreements.
However, measures to resolve G-SIIs must also account of the specificities of insurance including:
- Measures needed to separate NTNI activities from traditional insurance activities;
- The possible use of portfolio transfers and run off arrangements as part of the resolution of entities conducting traditional insurance activities; and
- The existence of policyholder protection and guarantee schemes (or similar arrangements).
Higher loss absorption (HLA) capacity
The IAIS proposes a cascading approach to increasing HLA capacity. Initially, higher HLA requirements would be targeted on specific G-SII group entities depending on the extent to which it had demonstrated effective separation between traditional insurance and NTNI activities, with additional capital being required in relation to activities that have the potential to generate or aggravate systemic risk (e.g. NTNI businesses). Subsequently, an assessment of the adequacy of group HLA levels would also be performed. This would take into account the level of HLA in individual group companies and any entity separation that exists, but only where that HLA was not created by multiple-gearing through down streaming capital within the G-SII. However, the IAIS acknowledges that there is an on-going internal discussion as to whether this subsequent step is required if targeted HLA and other measures (such as restrictions and prohibitions) are effective in reducing systemic importance to an acceptable level. In all cases, higher HLA capacity could only be met by “the highest quality capital”, being permanent capital that is fully available to cover losses of the insurer at all times on a going-concern basis.
Implementation time frame
A detailed timeline for the implementation of G-SII policy measures is detailed below:
Key Implementation Dates and Timeframes
|First G-SIIs designated (with annual designations thereafter expected each November)|
|Implementation of enhanced supervision and effective resolution commences|
|IAIS to elaborate proposed HLA capacity measures|
Within 12 months of designation
|Crisis Management Groups (CMGs) to be established|
Within 18 months of designation
|Other resolution measures to be completed|
Within 18 months of designation
|Systemic Risk Reduction Plan (SRRP) to be completed|
Within 36 months of designation
|Implementation of SRRP to be assessed|
November 2014 to 2016
|G-SIIs designated annually (with HLA not applicable until 2019)|
|G-SIIs designated based on 2016 data (with HLA applicable from 2019)|
|HLA capacity requirements apply based on assessment of implementation of the structural measures|