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Insurer Bosses Say Regulators’ Too-Big-to-Fail Proposals Flawed

International insurance regulators’ proposed method of designating companies with global systemic importance could jeopardize the financial system and distort competition, according to the industry’s top executives.

“The insurance sector and the wider financial system could be destabilized if a designation method overlooks companies that should be designated systemically risky or does not provide the appropriate incentives to eliminate potential sources of systemic risk,” The Geneva Association of insurance executives said in a comment yesterday on a consultation paper posted on the International Association of Insurance Supervisors’ website.

The IAIS and the Financial Stability Board, which coordinates the work of regulators around the world, plan to consider criteria including size, global activity and the amount of non-insurance business to identify firms considered too big to fail and thus deserving greater scrutiny.

“A designation based on size would be intuitively against the basic insurance concept of the law of large numbers and the benefits of the diversification of risks,” according to the Geneva Association, a group of 90 chief executive officers from insurance companies and reinsurers led by Munich Re CEO Nikolaus von Bomhard.

Countries and lenders may have greater trouble financing themselves should insurance companies be motivated to cut their holdings of government and bank debt to reduce their “systemic risk” ranking, the group said.

The most appropriate way to identify systemic risk is to look at industrywide practices and activities rather than examine individual institutions, the Geneva group said. In a research report in April 2011, it identified speculative derivatives trading on non-insurance balance sheets and the mismanagement of short-term funding as activities that could pose systemic risks as defined by the FSB.

The IAIS had invited interested parties to comment on its consultation document in May. The Financial Times reported the Geneva Association’s comments earlier today.

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