Global Regulation of Finance: The G20 Financial Stability Board lists 9 Systemically Important Insurers (ie. Insurance is now Too-Big-To-Fail)

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The “Too Big To Fail” concept coined for banks now applies to insurers: AIG, MetLife, Prudential Financial in the US; Allianz, Generali, Aviva, Axa, and Prudential in Europe; and Ping An in China, have now joined the list of G-SII (global systemically important insurers) set by the Financial Stability Board based on criteria such as size, global activity and amount of non-insurance businesses they run.

Insurers now need to work with regulators to understand the impact of G-SII policies. The FSB will leave it up to individual countries to determine how they will implement the recommendations. In the US for instance, this process is defined by the 2010 Dodd-Frank financial overhaul law, which sets out a multi-stage process for determining which non-bank financial firms may need additional scrutiny and higher capital requirements.

Implementation details for higher “loss absorbency requirements” are to be developed by the end of 2015 and will apply from January 2019. Reactions have ranged from acknowledgement (AIG) to appeal against the designation (Prudential Financial) on the grounds that “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 is trying to avoid“.

Another consequence is the request from supervisors for the type of “bail-in” tools applicable to banks. The FSB recommends that resolution authorities should have the power to restructure or limit insurance and reinsurance liabilities, and allocate losses to creditors and policyholders in a way that is consistent with the statutory creditor hierarchy. Once capital, debt instruments, and other senior unsecured or subordinated liabilities have been written off or converted into capital, measures might include reducing the value of future claims and benefits, suspension or termination of contract options, and reductions on the value of reinsurance contracts.

“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” – Dieter Wemmer, CFO of Allianz

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