July 19, 2013 by Canadian Underwriter
Some members of the property and casualty insurance industry have responded to the list of globally “systemically important” insurers released on Thursday, both commending the move and pointing out its flaws.
The Financial Stability Board published an initial list of nine global insurers deemed to be systemically important (G-SIIs), based on policy measures from the International Association of Insurance Supervisors.
That list, similar to one published of systemically important banks, will be updated annually beginning in 2014. A similar list of reinsurance companies is also expected a year from now.
“The concrete ramifications of this are now to be determined together with the regulators,” Allianz SE, one of the nine insurers listed, noted in a statement. “Therefore, it is too soon to give a detailed assessment of its effects,” it said.
“Even though we continue to be of the opinion that the insurance business in general and Allianz in particular does not represent a systemic risk, we acknowledge the decision of the FSB and will continue to support its efforts for more stable financial markets,” Dieter Wemmer, the company’s CFO noted in the statement.
“Allianz enjoys a widely diversified, resilient business model, a very solid capital base and sustainable profitability. Therefore, we are well positioned to manage the new requirements this designation will lead to regardless of the specific form they take.”
P&C insurers’ association responds
The Property Casualty Insurers Association of America (PCI) mostly commended the FSB and IAIS’ actions.
“PCI appreciates that the FSB implicitly recognized that the vast majority of insurance companies are not systemically important by designating as G-SIIs only a very small number of insurance companies,” David Snyder, the association’s vice president of international policy noted in a statement.
“PCI also commends the IAIS for taking a clear and final position that the traditional insurance business model does not pose systemic risk,” he said.
“International insurance regulators through the IAIS have concluded again that neither the short nor long-term experience of insurance markets, including during the global financial crisis, provides any evidence that traditional insurance generates or transmits systemic risk in the financial system or the real economy,” the statement also said.
“The potential for systemic risk arise only from non-traditional or non-insurance activities. And IAIS stated that traditional property and casualty activities do not give rise to systemic risk.”
The group did, however, say that in the U.S. context, the costs of additional regulation shouldn’t outweigh the benefits or harm competitiveness.
American Insurance Association expresses concerns with policy measures
In its own statement, the American Insurance Association (AIA) expressed some concerns with the new policy measures.
“While the IAIS acknowledges the low potential for systemic risk from regulated insurance activities, we remain concerned with the designations and the methodology that produced the designations for a few reasons,” the group’s president and CEO Leigh Ann Pusey said in its release.
The methodology compared insurers to one another, rather than to all types of financial institutions, leaving the group “not confident that the process yielded results based on objective ‘systemic risk’ criteria,” the statement said.
“…For those designated as G-SIIs, the IAIS plans to now develop backstop group capital requirements that will be applied on a global basis,” the statement also noted.
“If companies are incorrectly designated as G-SIIs, application of heightened capital standards could end up either harming their ability to compete or could unintentionally lead to the type of systemic threat that the FSB and IAIS are trying to avoid.”
‘More work needed,’ Geneva Association says
The Geneva Association has developed its own research on systemic risk in the traditional insurance and reinsurance industry and also pointed out potential competitiveness issues that could arise from capital requirements.
“The Association’s research suggests that strong lead supervision of an insurance group can be more effective than higher loss absorbency (HLA) in addressing systemic risk,” John H. Fitzpatrick, secretary general of the association said in a statement following the release of the G-SIIs’ criteria.
“That said, any ‘backstop capital requirement’ needs to be tailored specifically for the insurance business model and care taken to avoid creating new competitive issues,” he added.
“More work will be needed to refine the process for identifying and dealing with systemic risk in insurance and ensuring consistency with reinsurance,” the association also said.
“Ultimately, it will also be important for the comparison of systemic risk to be made across the whole financial services industry so that appropriate attention is paid to the largest pockets of systemic risk in the system. The results of the designation process for insurers overstate the importance of the top-ranked insurers compared to other institutions in the financial services industry.”