Insurance Supervisors Ready to Identify Too-Big-To-Fail Insurers

Insurance supervisors have proposed identifying too-big-to-fail insurers based on criteria including size, global activity and the amount of non-insurance activities they have, saying they could face stricter supervision.

Using 2010 data collected from 48 global insurance groups the International Association of Insurance Supervisors wants to measure the impact that distress or failure may have on the global financial system and the wider economy, according to the public consultation document published on its website today. The IAIS has asked insurers and other interested parties to submit comments on the proposed methodology by July 31.

The association, in Basel, Switzerland, is helping the Financial Stability Board draft a list of insurance companies considered as systemically important, and thus too big to fail. Those firms could then face restrictions on certain activities and stricter supervision. The FSB is seeking to prevent a repeat of the turmoil that followed the collapse of Lehman Brothers Holdings Inc. and the bailout of American International Group Inc.

“The potential for systemic risk within the insurance sector needs to be considered where insurers deviate from the traditional insurance business model, and more particularly where they enter into non-traditional insurance or non-insurance activities,” said Peter Braumueller, the head of the IAIS.

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

Life insurance and variable annuities with additional guarantees and mortgage guarantee insurance are listed as “semi-traditional.”

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