UK: Nine Insurers Join The SIFI Club

Last Updated: 24 July 2013
Article by Deloitte Financial Services Group

Most Read Contributor in UK, August 2017

Late on 18 July 2013 the Financial Stability Board (FSB) designated nine global insurance companies as global systemically important insurers (G-SIIs). As a result, these firms will be subject to enhanced supervision and increased regulatory requirements in the areas of recovery and resolution planning as well as capital. The implementation deadlines for these requirements start as early as July 2014 and, in the case of additional capital requirements, extend to 2019.

Who are the G-SIIs?

The FSB identified the following nine insurance groups as systemically important:

  • In the UK: Aviva and Prudential
  • In the US: AIG, MetLife and Prudential Financial
  • In Germany: Allianz
  • In France: Axa
  • In Italy: Assicurazioni Generali
  • In China: Ping An Insurance (Group) Company of China

As expected, the list of G-SIIs is significantly shorter than the 28-member list of Global Systemically Important Banks (G-SIBs). This reinforces the point that has been made by the insurance industry all along, namely that insurers generate much less systemic risk than banks.

From 2014 onwards, the list of G-SIIs will be revised annually, and published each November. The FSB has undertaken to announce if any reinsurers are systemically important by mid-2014.

Overview of Policy Measures

Being designated a G-SII subjects these nine insurers to a set of IAIS policy measures, which the FSB also endorsed yesterday. Consistent with the treatment of all Systemically Important Financial Institutions (SIFIs), these cover three areas: enhanced supervision, recovery and resolution planning and higher loss absorbency requirements. To a significant degree the policy measures reflect the view that it is the insurer's involvement in non-traditional, non-insurance activities (NTNIA) that is the core source of systemic risk. Notably, the IAIS does not give a black-and-white list of what constitutes NTNIA. Instead, it provides a set of examples and outlines principles, on the basis of which group-wide supervisors (i.e. the PRA for UK headquartered insurers) will have the power to determine which activities constitute NTNIA. That said, certain policy measures extend to traditional insurance business as well. These are set out below.

Enhanced supervision
Immediately after designation, each G-SII is expected to start developing a Systemic Risk Management Plan (SRMP) with the objective of managing, mitigating and possibly reducing its systemic risk. The plan should address the risks which gave rise to the decision to designate the insurance group as a G-SII and which will have been notified to the insurer. The SRMP is to be developed by July 2014.

The policy measures provide significantly more detail on the treatment of NTNIA for risk mitigation purposes – ranging from effective separation of these activities to their restriction and/or prohibition. Importantly, NTNIA separation is left as a choice. G-SIIs and their supervisors will have to weigh up the capital benefits, resolvability impacts and risk management implications of separating NTNIA. The group-wide supervisor is also given the power to either restrict NTNIA, through for example requiring prior approval or diversifying associated risks, or directly prohibit it.

G-SIIs will also be subject to the FSB's recommendations on the Intensity and Effectiveness of SIFI supervision and group-wide supervisors will evaluate and monitor G-SIIs' liquidity management.

Recovery and resolution
As for other SIFIs, G-SIIs will have to comply with the FSB's Key Attributes of Effective Resolution Regimes (KAs). At a minimum, insurers will have to prepare a Recovery and Resolution Plan (RRP), undergo resolvability assessments and be overseen by a Crisis Management Group, comprised of the home supervisor and all host authorities from jurisdictions in which the group has entities which are material to its resolution.

In addressing how the recovery and resolution requirements, that have been focused thus far on banks, the IAIS has been conscious of the need to take into account some important insurance specificities. These are:

  1. Any plans and steps separating NTNIA from traditional insurance activities;
  2. The possible use of portfolio transfers and run off arrangements as part of the resolution of entities conducting traditional insurance activities. To this end, supervisors will also need to determine whether a mainly traditional insurance group with a large derivatives portfolio may experience a disorderly run-off due to legally binding close-out netting of those derivatives under master trading agreements; and
  3. The existence of policyholder protection and guarantee schemes (or similar arrangements) in many jurisdictions.

The IAIS has committed to developing a template for assessing the resolvability of G-SIIs. Furthermore, later this summer the FSB is due to publish an insurance-specific appendix to its KAs.

Higher Loss Absorption

G-SIIs should have a higher loss absorption capacity through having more of the highest quality capital. In the absence of a global capital standard for insurers, the IAIS's first task will be to develop straightforward, backstop capital requirement for all group activities, including non-insurance subsidiaries. This will then form the basis for calculating how much additional capital G-SIIs must hold.

Precisely how the amount of HLA will be calculated is not yet clear.  The principles are as follows.  There will be a base requirement which will consist of the new backstop capital requirement, once the methodology has been agreed.  There will then be an "uplift" to the base requirement to reflect the G-SII's involvement in NTNIA.  The size of the uplift may vary depending on how effectively the NTNIA activities have been separated from the traditional insurance business carried out by the G-SII. 

The IAIS will develop its straightforward, backstop capital requirements by the end of 2014. Implementation details for the HLA will then be finalised by the end of 2015.These will apply to those G-SIIs which appear on the list published in November 2017. Implementation is from 2019.

G-SII Check List

By July 2014

1. Development and implementation of a SRMP.

2. Establishment of a CMG.

By end 2014

3.   Development of a RRP, including a liquidity risk management plan. G-SIIs will need to take into consideration the insurance-specific recommendations of the FSB's KAs which are due to be published later this summer, as well as the recently published FSB guidance papers on (1) developing resolution strategies and (2) recovery triggers and stress scenarios.

By January 2019

4.  G-SIIs designated in November 2017 to apply the HLA requirements, which the IAIS will develop by the 2014 G20 Summit, finalising implementation details by end 2015.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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