Austria is forbidding insurers from selling credit-default swap debt protection because the derivative contracts circumvent industry rules.
“CDSs are usually meant to cover a certain economic risk of a third party,” the nation’s Finanzmarktaufsicht regulator said in a circular sent to insurers in the Alpine country that was published today. “But they intentionally aim to reach that goal with other means than insurance, because the regulations applicable to the insurance business are to be avoided.”
Austrian insurers have written only a “limited amount” of credit protection through swaps, FMA spokesman Klaus Grubelnik said by phone from Vienna. The circular clarifies existing laws prompted by an isolated violation, he said. He declined to elaborate.
The ban is based on a view that’s “shared by European regulators,” the FMA said in the circular.
Austria’s biggest insurers include Vienna Insurance Group AG, Uniqa Versicherungen AG (UQA) and subsidiaries of Assicurazioni Generali SpA (G) and Allianz SE. (ALV) They can continue to insure credit risk through other products and can still hedge their own risk by buying credit-default swaps, Grubelnik said.
American International Group Inc. (AIG) was forced to take an $85 billion bailout from the U.S. government because of losses from selling default swaps. In Europe, Swiss Re turned to Warren Buffett for a 3 billion-franc ($3.25 billion) capital injection and abandoned trading credit derivatives after reporting record writedowns and losses of $8.3 billion in 2008.
“It’s not an industry-wide problem among European insurers, it’s a special problem of a couple of companies,” Fabrizio Croce, an analyst at Kepler Capital Markets in Zurich, said in a telephone interview. “In the U.S. it’s common practice, but in Europe it always was only a sporadic issue.”
Austria itself lost about 1 billion euros ($1.3 billion) in the Greek government’s debt swap this year because nationalized lender KA Finanz AG had written CDS protection against a default of Greece.
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