identifying and supervising global systemically important insurers

Identifying and supervising Global Systemically Important Insurers

Yoshihiro KawaiSecretary General

International Association of Insurance Supervisors

Santiago de Chile 19 November 2013

Outline

1. Relevance

2. Background1. What are G-SIFIs?

2. Role of insurance in financial stability

3. Global Systemically Important Insurers (G-SIIs)1. Designation

2. Policy measures

4. Conclusion

1. Relevance

• G-SII policy measures have impact on host jurisdictions

• G-SII policy measures will be a basis for domestic SIIs discussions in coming months

• G-SII policy measures spillover into IAIG policy measures (resolution issues, capital standards, group wide supervision)

Hence: G-SII policy measures are also relevant for jurisdictions where no G-SII is domiciled.

Outline

1. Relevance

2. Background1. What are G-SIFIs?

2. Role of insurance in financial stability

3. Global Systemically Important Insurers (G-SIIs)1. Designation

2. Policy measures

4. Conclusion

2. Background: What are G-SIFIs?

• What are G-SIFIs (Global Systemically Important Financial Institutions) ?

• Lehman Brothers failure in September 2008

• Government rescues of financial institutions

• Why are G-SIFIs important?  

Outline

1. Relevance

2. Background1. What are G-SIFIs?

2. Role of insurance in financial stability

3. Global Systemically Important Insurers (G-SIIs)1. Designation

2. Policy measures

4. Conclusion

2. Background: Role of insurance in financial stability (i)

• Differences exist between traditional insurance and banking business, e.g.

- Banking business has inherent maturity mismatch

- Insurance underwriting risks largely not correlated with economic business cycle

- Cash outflows can occur over long periods of time

• The unique insurance business model helps insurance firms to withstand systemic risk better than banks.

However….

2. Background: Role of insurance in financial stability (ii)

• Insurance sector is susceptible to systemic risk generated in other parts of the financial sector

• Insurers may amplify risk under specific circumstances

• Non-traditional insurance and non-insurance activities within insurance groups may generate or amplify systemic risk.

Outline

1. Relevance

2. Background1. What are G-SIFIs?

2. Role of insurance in financial stability

3. Global Systemically Important Insurers (G-SIIs)1. Designation

2. Policy measures

4. Conclusion

IAIS indicator-based assessment approach

• IAIS agreed an indicator-based assessment approach similar to the G-SIBs (Global Systemically Important Banks) methodology but with differences to reflect the insurance business model

- Instead of the G-SIB ‘complexity category’, a specific ‘Non-Traditional and Non-Insurance (NT-NI) category

- Higher weighting for NT-NI and interconnectedness

G-SIIs: Assessment methodology (i)

• 20 indicators in 5 categories: size, global activity, interconnectedness, Non-Traditional insurance and Non-Insurance (NTNI) activities and substitutability

• In total 50 firms from 14 jurisdictions were included in the data call

G-SII: Assessment methodology (ii)

Categories Weight

Size 5%

Global activity 5%

Interconnectedness 40%

NTNI activities 45%

Substitutability 5%

Traditional Non-traditionalU

nder

writ

ing

• Most life and non-life (re)insurance business lines

• Variable annuities• Trade credit insurance• Mortgage guarantee

insurance

• Alternative risk transfer (ART)

• Financial guarantee insurance

• Finite reinsurance

Insu

ranc

e

• Proprietary investment function (ALM)

• Funding through equity and debt issues; incl. securities lending

• Proprietary and derivatives trading (non ALM related)

• Synthetic investment portfolios

• Embedded Value securitisations

• Excessive repos and securities lending

Inve

stm

ents

an

d fu

ndin

g ac

tiviti

es

• Capital market business• CDS/CDO underwriting• Banking, incl. Investment banking and hedge fund activitiesN

on-

insu

ranc

e

G-SIIs: NTNI (Non Traditional and Non Insurance)

First cohort of G-SIIs (in alphabetical order):• 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.• Prudential plc

G-SII: Assessment methodology (iii)

Outline

1. Relevance

2. Background1. What are G-SIFIs?

2. Role of insurance in financial stability

3. Global Systemically Important Insurers (G-SIIs)1. Designation

2. Policy measures

4. Conclusion

Objectives of G-SII policy measures

G-SII policy measures should:

1.Reduce moral hazard from the failure of a G-SII

2.Reduce negative externalities from the failure of a G-SII,

3.Reduce the probability and impact of default of G-SIIs

4.Incentivise G-SIIs to become less systemically important

G-SIIs: Policy framework

• Enhanced supervision

• Effective resolution

• Higher loss absorbency

G-SIIs: Policy framework

Enhanced supervision

• Systemic risk management plan (SRMP)

• Group-wide supervision

• Liquidity management

G-SIIs: Policy framework

Effective resolution

• Crisis management groups (CMGs)

• Recovery and resolution plans

• Resolvability assessments

• Institution specific cross-border cooperation agreements

G-SIIs: Policy framework

Higher loss absorbency (HLA)

• Step1: Develop straightforward backstop capital requirements by September 2014 as a basis

• Step 2: Development of HLA by the end of 2015 and full implementation by 2019

G-SIIs: Time frame

Key Implementation

Dates

Action required (or intermediate activity) 

July 2013 First G-SIIs designated

July 2014 • Crisis Management Groups (CMGs) to be established• Recommendation on G-SII status of reinsurers• Systemic Risk Management Plan (SRMP) to be completed

November 2014 Straightforward back stop capital requirements BCRs to be developed

End 2014 Recovery and resolution plans including liquidity risk management plans to be developed and agreed by CMGs

End 2015 Higher loss absorbency HLA developed (for all G-SIIs)

July 2016 Implementation of SRMP to be assessed

End 2016 Risk based global insurance capital standard (ICS) developed (for all IAIGs)

January 2019 Full implementation of HLA and ComFrame, including ICS

Outline

1. Relevance

2. Background1. What are G-SIFIs?

2. Role of insurance in financial stability

3. Global Systemically Important Insurers (G-SIIs)1. Designation

2. Policy measures

4. Conclusion

Conclusion

• G-SII policies – catalysts for developments on global standard setting

• Importance for both home and host supervisors

• Tight deadlines for both development and implementation

• IAIS commitment to develop and implement solid policy measures for G-SIIs with tight deadline

Thank you very much

www.iaisweb.orgyoshihiro.kawai@bis.org