IAIS classes ILS and cat bonds as traditional insurance activities

The International Association of Insurance Supervisors (IAIS) has published its assessment methodology and policy measures for global systemically important insurers, or G-SIIs. As we wrote previously, there had been some uncertainty about how insurance-linked securities and catastrophe bonds would be treated, but this has now been clarified.

When the measures were originally proposed, the IAIS said that non-traditional re/insurance activities were a key focus and that ILS was a factor they were considering with regards to systemic risk. It even went so far as to say that the market for insurance-linked securities and catastrophe bonds was a sector which, while a small portion of the overall reinsurance market as it is today poses little risk, if it grew significantly there could be a systemic risk worth monitoring. Hence they concluded that these kind of risk transfer activities, such as ILS and cat bonds, do need to be monitored to ensure they do not become overly risky.

In the documentation released by the IAIS it has now clarified its position on ILS and cat bonds and has said that it will classify them as ‘traditional insurance activities’ rather than non-traditional. Thus meaning they will not count towards an insurers systemic riskiness on their own.

However, some types of risk financing which is akin to, or even included within, the activities typically classed as ILS are deemed as non-traditional. These include financing or monetizing ILS transactions, such as; Embedded Value/Present Value of Future Profit securitisations and ILS with financial risk as material trigger condition.

This will please the catastrophe bond market where there had initially been some concern about how the IAIS would treat ILS and cat bond transactions. The full transfer of risk and the fully-collateralized nature of cat bonds and ILS has likely helped the IAIS appreciate that these are not systemically risky instruments on their own. It is worth noting that an IAIS spokesperson told us that the scope of non-traditional, non-insurance (NTNI) activities is still being considered and could change.

The release of the assessment methodology and policy measures, which describe how the IAIS will identify whether an insurer or reinsurer is systemically risky, along with the measures they suggest are followed to minimise systemic risk for those companies identified, coincides with the G20’s Financial Stability Board naming a list of G-SIIs.

The FSB has consulted with the IAIS, it found its assessment methodology and policy measures aligned with the FSB’s own thinking, and other national authorities to identify the first named globally systemically important insurers. The group of insurers identified will all undergo enhanced supervision starting immediately.

The insurers identified as systemically important are; 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. and Prudential plc.

The policy measures that will be applied to these nine insurers are:

1. The recovery and resolution planning requirements under the FSB’s Key Attributes of Effective Resolution Regimes, in particular:
   • the establishment of a Crisis Management Group (CMG);
   • the development of a recovery and resolution plan (RRP), including a liquidity risk management plan;
   • the carrying out within the CMG of resolvability assessments;
   • the development of institution-specific cross-border cooperation agreements among relevant resolution authorities.
2. Enhanced group-wide supervision, including:
   • The group-wide supervisor to have direct powers over holding companies.
   • The group-wide supervisor to oversee the development and implementation of a Systemic Risk Management Plan.
3. Higher loss absorbency requirements (HLA) for non-traditional and noninsurance activities. In the absence of a global capital standard as a basis, these will be built upon straightforward, backstop capital requirements for all group activities, including non-insurance subsidiaries. HLA requirements will need to be met by the highest quality capital.

The FSB will update the list of globally systemically important insurers regularly every November, beginning in 2014.

Mark Carney, Chairman of the FSB and Governor of the Bank of England said; “Today marks an important step toward more broadly addressing the risks associated with systemically important financial institutions. These policy measures will be followed over time by a substantially strengthened comprehensive regulatory and supervisory framework for all internationally active insurers. A sound capital and supervisory framework for the insurance sector is essential for supporting financial stability.”

“Since the financial crisis, supervisors across the sector have worked diligently to address risks to the global financial system from systemically important financial institutions or SIFIs and macroprudential shocks,” commented Peter Braumüller, Chair of the IAIS Executive Committee. “The measures and framework put forth by the IAIS today complete a major piece of this reform in a manner specifically designed for the insurance sector.”

The release of the assessment methodology and policy measures, alongside the naming of the first list of G-SIIs is the first step in a long-road towards trying to maintain a stable financial market. The methodology for identifying who is, and isn’t, a G-SII will likely be discussed and debated at length.

All of the documentation released by the IAIS can be found on its website here, including the assessment methodology and policy measures for G-SIIs as well as details on a framework for macroprudential policy and surveillance.

Here are some links to our coverage of this topic (oldest first):

Nov 2011 – IAIS: non-traditional re/insurance activities increase exposure to financial markets

May 2012 – IAIS to identify globally systemically important insurers, ILS are a factor

Jul 2012 – As insurance-linked securities markets grow potential for systemic risk needs to be monitored

Aug 2012 – When assessing systemic risk, focus on activities of systemic importance: Geneva Association

Oct 2012 – IAIS proposes policy measures for globally systemically important insurers

Dec 2012 – Global insurers pose less systemic risk than global banks