Too-Big-To-Fail Insurers Need to Cut Risks, Association Says

Insurers deemed too big to fail should cut systemic risks, increase capital buffers and improve their liquidity planning to reduce the impact on economic activity should they collapse, an industry regulator said.

The proposals by the International Association of Insurance Supervisors also include measures for more intensive supervision, provisions for effective resolution regimes and the separation of non-traditional and non-insurance activities, according to the public consultation document published on the Basel, Switzerland-based watchdog’s website today.

The Financial Stability Board, guided by the IAIS, will decide in April which insurers are too big to fail based on criteria including size, global activity and the amount of non- insurance businesses they have, it said, while the group plans to implement the stricter supervision “immediately afterwards.” The organization today asked insurers and other interested parties to submit comments on the proposed rules by Dec. 16.

“The proposed policy measures are intended to reduce moral hazard and the negative externalities stemming from the potential disorderly failure posed by global systemically important insurers,” said Peter Braumueller, the head of the IAIS.

The association and the FSB are seeking to prevent a repeat of the turmoil that followed the collapse of Lehman Brothers Holdings Inc. and bailout of American International Group Inc. (AIG)

Capital Buffers

Insurers will have until 2016 to start a risk-reduction plan, and should begin to implement measures that include enough capital buffers to absorb losses, the IAIS said in its proposals. The group will develop a concrete plan on loss absorption by the end of next year.

Non-traditional activities include alternative risk transfers such as insurance-linked securities and financial guarantee insurance. Non-insurance operations include capital market businesses, banking, third-party asset management and industrial activities.

Life insurance and variable annuities with additional guarantees and mortgage guarantee insurance have been listed as semi-traditional.

Selling credit-default swaps is considered a non-insurance activity and should carry tougher capital requirements, Braumueller told journalists during a conference call after Austria blocked insurers from selling the instruments.

AIG was forced to take an $85 billion bailout from the U.S. government because of losses from selling default swaps. Austria 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 Greek default.

CDSs are covered by the methodology proposed by the IAIS today, Braumueller said.

To contact the reporter on this story: Carolyn Bandel in Zurich at cbandel@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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