IAIS propose measures to tackle threat of failure at largest insurers

Its proposals consist of three main measures-enhanced supervision, effective resolution and higher loss absorption capacity-that focus on group-wide supervision and non-traditional and non-insurance (NTNI) activities. The paper was endorsed for consultation by the Financial Stability Board (FSB), which is coordinating the project to reduce the moral hazard posed by global systemically important financial institutions. Supervisors, insurers and other interested parties are encouraged to submit comments on the proposed IAIS policy measures by December 16.hideAccording to the IAIS, the global financial crisis 'underscored the interconnected nature of financial firms and the severe financial and economic costs associated with public sector interventions for those that were distressed or expected to fail'. The crisis also highlighted the need to act promptly and proactively in order to identify firms that are systemically important and take measures to lessen the impact and reduce the hazards associated with their failure, it added. Following the crisis central banks and financial sector supervisors, under the purview of the FSB and the G20, were charged with identifying institutions that pose a systemic risk, with the IAIS taking on the role in the world of insurance. "These proposed policy measures are intended to reduce moral hazard and the negative externalities stemming from the potential disorderly failure posed by a G-SII," said Peter Braumüller, Chair of the IAIS Executive Committee. "Each of the proposed policy measures has also been designed to take account of the specific nature of the insurance business model and is the result of intensive and thorough discussion at the IAIS," he added. The IAIS has proposed a framework of policy measures based upon plans published by the FSB but with adjustments that reflect the differences between insurers and other financial institutions. The proposal consists of three main types of measures. The first revolves around enhanced supervision and builds on the IAIS Insurance Core Principles and the FSB's Supervisory Intensity and Effectiveness recommendations. It includes the development of a systemic risk reduction plan (SRRP) and enhanced liquidity planning and management. These measures aim to foster global convergence of regulatory and supervisory measures and approaches for internationally active insurance groups (IAIGs), whether or not they are identified as G-SIIs. For G-SIIs, supervisors should have direct powers over holding companies to ensure that a direct approach to consolidated group-wide supervision can be applied, propose the IAIS. Special attention should be paid to group-wide supervision since G-SIIs are most likely to take the form of a group and also because non-traditional and non-insurance activities are often carried out by separate entities within a group, and/or the group may have significant interconnections to other parts of the financial system, noted the association. Supervisors should require G-SIIs to have, in particular, adequate arrangements in place to deal with liquidity risk management for the whole group, primarily for the non-traditional and non-insurance business, but also for the remainder of the G-SII, state the proposals. "The authorities should analyse activities that cause systemic importance of G-SIIs and take necessary measures to reduce that systemic importance. The authorities should oversee the development of a systemic risk reduction plan (SRRP) by each G-SII (in addition to recovery and resolution plans (RRPs) to reduce that systemic importance and monitor implementation of the plan. Where feasible and appropriate, the SRRP may include effective separation of systemically important NTNI activities from traditional insurance business and/or restrictions or prohibitions of specified systemically important activities or any other measures," said the IAIS. Where separation of non-traditional and non-insurance activities is contemplated, the systemic risk reduction plan should seek to ensure it achieves self-sufficiency in terms of structure and financial condition of the separated entities. The second tranche of proposals address effective resolution to potential problems. It sets out a range of specific requirements that should apply to any financial institution whose failure could be systemically significant or critical. The IAIS proposals take account of the specificities of insurance through the inclusion of plans for separating non-traditional and non-insurance business activities from traditional insurance activities, the potential use of portfolio transfers and run-off arrangements and the recognition of existing policyholder protection and guarantee schemes. The third set of measures focuses on ensuring higher loss absorption (HLA) capacity at G-SIIs. "Mandating a higher loss absorption capacity for a G-SII will help to reduce its probability of failure. This is important given the greater risks that the failure of G-SIIs poses to the global financial system," said the IAIS. The IAIS proposes a cascading approach to the fulfilment of higher loss absorption capacity. "In the first step if, and to the extent to which, the G-SII has demonstrated effective separation of NTNI activities from traditional insurance activities, targeted HLA will be applied to the separate entities. Under the second step, whether or not NTNI activities have been separated, an overall assessment of group-wide HLA needed will be undertaken and the group-wide supervisor will determine whether the HLA capacity held at the NTNI entities is sufficient or needs to be further increased," explained the IAIS. Following the two-month consultation period, the first cohort of G-SIIs will be designated and subsequently published in the first half of 2013. G-SII measures on enhanced supervision and effective resolution should begin to be implemented immediately afterwards, said the IAIS. The systemic risk reduction plan and measures on effective resolution should be completed within 18 months of designation, it added. The authorities should assess the implementation of the systemic risk reduction plan in 2016. Measures on higher loss absorption capacity should begin to be implemented in 2019, allowing for the assessment of implementation of structural measures in the systemic risk reduction plan, IAIS concluded.

IAIS propose measures to tackle threat of failure at largest insurers

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