The recent release of the Financial Stability Board's GSII list has led to complaints that insurers are not being differentiated from banks. Francesca Nyman explains.
The financial crisis in 2008 introduced the public companies that are "too big to fail" into the public consciousness, institutions so inextricably linked with the rest of the financial world that their demise could put the global economy in jeopardy.
Twenty-eight banks were the first to be classified as systemically important by the Financial Stability Board and the insurance industry lobbied long and hard to ensure that they alone would wear the label. But on 17 July, nine firms were designated globally systemically important insurers by the FSB, five of them - Allianz, Axa, Aviva, Generali, and Prudential - from European shores.
The firms on the list, devised by the FSB in consultation with the Institution of Insurance Supervisors, face enhanced group-wide supervision, higher loss absorbency requirements and must produce recovery and resolution plans. The expected cost of this extra layer of regulation means questions have been asked about the fairness of the methodology.
The argument made by the industry is that the insurance model, in as far as it looks to match long-term assets with long-term liabilities, is unlikey to create systemic risk. This has long been the position of insurance think tank the Geneva Association.
Daniel Haefili, head of insurance and finance at the Geneva Association says: "AIG didn't fail because of its insurance business. It got into trouble because of a non-insurance subsidiary. We have always said the focus should be on certain activities which could create systemic risk."
"The logic to determine the list has not been made completely transparent so it does seem as if the biggest and broadest firms have been chosen." Eliot
So does the list take this into account? Have these insurers been singled out due to high-risk, non-traditional insurance activities which they engage in? According to Peter Eliot, equities analyst at Berenberg bank, it is difficult to draw this conclusion.
"The logic to determine the list has not been made completely transparent so it does seem as if the biggest and broadest firms have been chosen," he says. "In terms of their activities Axa is the one that stands out the most for its involvement with guaranteeing US annuities. Allianz has a large asset manager but I don't think it poses a systemic risk. It's not taking naked or unhedged bets."
Allianz itself has been the most vocal in rejecting the label. Speaking at a briefing on the firms' 2013 interim results, chief executive officer Michael Diekmann said: "We still believe that traditional insurance business is not of systemic importance and that Allianz does not perform any activities that are of systemic importance."
Other insurers have remained tight-lipped claiming it is premature to comment ahead of further clarity on the measures. However, the belief is that, for European insurers, the consequences could be less severe.
"AIG didn't fail because of its insurance business. It got into trouble because of a non-insurance subsidiary." Haefili
According to Eliot for insurers such as Allianz which is "very well capitalised" the requirements are likely to be "little more than a tick box exercise". He adds: "The Generali's and the Axa's of this world are perhaps not in quite so secure a position," he says, "but I think the impact will be limited."
In theory the on-going Solvency II preparations mean that European firms should be ahead of their non-European counterparts. Ed Barron, insurance regulatory expert at PWC, says: "In the IAIS policy measures, when it talks about higher loss absorption capacity it says the assessment may take into account any capital charges imposed by a national regulator to mitigate the systemic risk for that insurer.
He adds: "While Solvency II doesn't have a module for systemic risk in its standard formula firms may already have it within their internal models. If not they may well deal with it under Pillar II, so you could argue that EU firms wouldn't have to hold more capital on top of the existing regulatory framework."
Future systemic risk
Despite the fanfare accompanying the list, as Matthew Tutton, manager at Deloitte's Centre for Regulatory Stategy believes there is no reason why the GSIIs of today necessarily have to be the GSIIs of tomorrow. "The list is subject to review annually and the higher loss absorbency requirements will only apply to the GSIIs on the 2017 list, with higher loss absorbency requirements coming into effect in 2019. There is an opportunity for some insures to drop off the list by 2017."
Peter Carter, director in Deloitte's restructuring financial services team believes national regulators will approach insurers between now and 2017 "to discuss whether it is possible to segregate non-traditional insurance activities from traditional activities to see whether they can change their model from a globally systemically important one to one that does not qualify."
While Solvency II doesn't have a module for systemic risk in its standard formula firms may already have it within their internal models." Barron
Restructuring and even disposing of parts of the business engaging in non-traditional activities is always an option, but Eliot does not expect insurers to follow the recent example of the banking sector in widespread sales of their asset groups.
Whichever firms comprise the final list, many remain unconvinced that the failure of a major insurer would have the far reaching repercussions to be considered systemic, with insurers not considered to have "a liquidity problem".
Rob Jones, managing director at ratings agency Standard & Poor's says: "When banks are in crisis there is often an urgent need for capital and liquidity and that's when governments have frequently stepped in previously. There isn't much track record of governments doing that for insurers. For virtually all of the globally systemically important banks we recognise that support in the form of additional notches of credit in our ratings. We've never done that for insurers and don't plan to unless our perception changes as to what governments will do in practice."
Jones adds: "Many mechanisms already exist to resolve insurers if they get into difficulty. They can be placed into run-off and there's generally not the urgency there is in a banking crisis so governments can work behind the scenes to facilitate a rescue that doesn't involve using tax payers money to shore them up."
"When banks are in crisis there is often an urgent need for capital and liquidity and that's when governments have frequently stepped in previously. There isn't much track record of governments doing that for insurers." Jones
However, Rob Curtis, global regulatory head at KPMG believes the performance of some insurers during the crisis led to a fundamental change in the landscape. He says: "The FSB clearly doesn't believe that the tools of run-off and portfolio transfer will be sufficient in all circumstances to resolve failing insurers. This stems from the fact that some of the very largest insurance groups suffered during the crisis and that exposed quite graphically the lack of group-wide supervision in place in some markets."
To address these concerns the FSB this month launched a public consultation on the application of the key attributes of effective resolution regimes for non-bank institutions, including insurers. As part of the proposals GSIIs will need to agree "living wills" with regulators which will plan for them to be wound down in an orderly fashion in situations where a recovery is not viable.
According to Curtis, it is this shift in perspective that may be the biggest challenge for insurers: "Most of the work that insurers do around their own risk solvency assessment or economic capital is on a going concern basis rather than a gone concern basis and this is where the extra analysis will have to be conducted.
He concludes: "The FSB is asking fundamental questions about winding up scenarios: how one would be managed, who would be affected and how they would limit the impact to the wider economy. Supervisors understandably want to make sure firms have some answers to these key questions."
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