In 2010, the G2011 reestablished the FSB to promote stability in
the international financial system by: assessing vulnerabilities in the system; advising on and monitoring best practices in meeting financial regulatory standards; promoting coordination and information exchanges among financial authorities; and managing contingency planning for the management of cross-border crises, particularly with respect to systemically important financial institutions. Members of the FSB have agreed to pursue the maintenance of financial stability, implement international financial standards (including the key standards for sound financial systems)12
and submit to periodic peer reviews using, inter alia, the IMF/ World Bank public FSAP reports.13
Global Systemically Important Financial Institutions (G-SIFIs).
In response to the recent economic crisis, the G20 and the FSB identified the need for more effective supervision of Systemically Important Financial Institutions (“SIFIs”). The FSB is coordinating an initiative to reduce the moral hazard posed by G-SIFIs and in 2010 developed a general framework, recommendation and timeline for identifying G-SIFIs and determining added loss absorbency measures necessary for risk reduction (“FSB Framework”).14 Initially G-SIFI-related
work focused on the banking sector. In November 2011 the
Basel Committee on Banking Supervision finalized a framework for identifying global systemically important banks, and at that time the FSB announced its first list of globally systemically important banks, which was thereafter revised in November 2012. The FSB Framework also reflected an intent to extend the G-SIFI framework to cover a wider group of SIFIs, including insurance companies. Therefore, in November 2011 the G20 leaders reiterated their expectation that the IAIS complete its assessment methodology for G-SIFIs in time for the June 2012 G20 Summit.
b) IAIS Proposal for Global Systemically Important Insurers (“G-SII”): IAIS G-SII Assessment Methodology and G-SII Policy Measures
Accordingly, in 2012 the IAIS issued two public consultation documents: (i) Global Systemically Important Financial Insurers: Proposed Assessment Methodology, dated May 31, 2012 (“G-SII Assessment Methodology”);15 and
(ii) Global Systemically Important Financial Insurers: Proposed Policy Measures, dated October 17, 2012 (“G-SII Policy Measures”).16 The G-SII Assessment Methodology
was developed to identify any insurer whose distress or disorderly failure would cause significant disruption to the global financial system, and the G-SII Policy Measures sets forth a proposed framework of policy measures that should be applied to insurers determined to be G-SIIs.
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Findings Regarding Insurance and Financial Stability.
The IAIS G-SII Assessment Methodology incorporates and reiterates the IAIS’s position on insurance and financial stability17 and includes the following findings:
g Insurance is founded on the law of larger numbers. Because
the insurance business model is to assume a large number of ideally uncorrelated risks, large, diversified insurers should present a lower systemic risk profile.
g In general, insurance underwriting risks are not correlated
with economic, business cycle and financial market risks; however, insurers are exposed to risks faced by other financial institutions, including credit risk, operational risk and market risk, as well as interest rate and exchanges risk.
g In contrast, insurance groups that engage in non-
traditional or non-insurance (“NTNI”) activities can be more vulnerable to financial market developments and therefore may be more likely to contribute to system risk. Examples of NTNI activities include financial guaranty insurance, capital markets activities such as credit default swaps, transactions for non-hedging purposes, derivatives trading or leveraging assets.
g Reinsurance is considered to be a traditional insurance
activity and can be a source of stabilization. Reinsurance is unlike the inter-bank market, and the degree of interconnectedness in the reinsurance sector is relatively small.
In summary, the IAIS noted that neither past insurance market experience nor the recent financial crisis provides any evidence of traditional insurance either generating or amplifying systemic risk. The potential for systemic importance is considered to arise only in NTNI activities undertaken by a small number of insurers.
Highlights of Assessment Methodology.
The IAIS’s proposed assessment methodology involves the following three steps:
Data Collection.
The IAIS noted that, unlike the banking sector where Bank for International Settlements statistics cover various areas of banking activities on a global basis, the IAIS has few precedents for collecting data on a global basis for the insurance sector. Nevertheless, in producing the G-SII Assessment Methodology, the IAIS looked at data collected from national supervisors and 48 insurers in 13 jurisdictions, selected on the basis of size and global reach (determined by reference to year-end 2010 data). The IAIS intends to further improve data quality and consistency and is planning to collect year-end 2011 data based on revised instructions and definitions, taking into account the experiences of the year-end 2010 data collection exercise and recent developments.
Methodical Assessment.
The data collected by the IAIS was used in the development of a set of “indicators” that are intended to identify G-SIIs by evaluating an individual insurer’s actual systemic importance to the global financial system by assessing the impact of a failure of that insurer on the global financial system and the wider economy. The process has 18 indicators, which are divided into the following five categories: (i) size; (ii) global activity; (iii) interconnectedness; (iv) NTNI activities as described above; and (v) substitutability.
The overall score for a particular insurer is calculated as the sum of all of the category scores, which are assessed by reference to a weighting for each indicator. As noted above, the IAIS does not believe that insurers engaged in traditional insurance activities in general are likely to pose systemic risk.
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