Too-Big-to-Fail Insurers Face 10% Higher Capital Requirement

  • Unregulated banking activities to have stricter requirements
  • Group cites risk of deviating from traditonal insurance

Global insurers with the greatest ties to the financial system would face an average increase of 10 percent to capital requirements under new standards proposed by a group of regulators.

The increase would be as high as 18.75 percent for unregulated-banking activities by firms deemed to be in a riskier tier, according to documents released Monday in Basel, Switzerland, by the International Association of Insurance Supervisors. For traditional insurance products sold by safer companies, the figure would be 6 percent.

Global regulators are seeking to limit risk at the biggest financial firms to avoid a repeat of the government bailouts that were required in the credit crisis. While more rescue funds went to banks, the U.S. had to prop up insurers led by New York-based American International Group Inc., which was hobbled by losses on derivative bets on subprime mortgages.

“The potential for systemic risk in insurance may become relevant where insurers significantly deviate from the traditional insurance business model,” the association said in a fact sheet. The rules are designed to “reduce the probability and impact of distress or failure” at a major firm.

Allianz, MetLife

AIG, Germany’s Allianz SE, Paris-based Axa SA and China’s Ping An Insurance (Group) Co. were among nine insurers designated by international regulators in 2013 as too big to fail. Also named to the global list were Prudential Plc and Aviva Plc of the U.K., Italy’s Assicurazioni Generali SpA, New York-based MetLife Inc. and Newark, New Jersey-based Prudential Financial Inc.

Under so-called higher-loss-absorbency rules outlined Monday, the capital standard would be at least 12 percent higher than 2015 basic capital requirements for non-traditional insurance. Such coverage could include policies tied to mortgages and variable annuities, which are retirement products where results can fluctuate with gyrations in financial markets.

Timing Questioned

MetLife, the largest U.S. life insurer, has been scaling back variable annuity sales in recent years. The company has been highlighting lines such as dental coverage or disability policies, where the insurer can reset prices to adjust to higher-than-expected claims costs, and where there is less risk tied to bond yields.

Still, Chief Executive Officer Steve Kandarian has said excessive regulation could put his company at a competitive disadvantage. The CEO has sought to overturn a U.S. designation that his company is a non-bank systemically important financial institution. He has also said international supervisors shouldn’t move too fast and that rules meant for banks wouldn’t fit his industry. MetLife didn’t get a Treasury Department bailout in the credit crisis.

“There must be significantly more research to understand what, if any, systemic risks can be associated with the business of life insurance,” Randy Clerihue, a spokesman for MetLife, said of the new proposals. “Until that work is completed, higher capital requirements will only raise costs for consumers while failing to achieve the goal of reducing risk in the financial system.”

Aviva Chief Financial Officer Tom Stoddard said he didn’t believe the insurer, the second-biggest in the U.K., would need to hold additional capital under the new proposals. A spokesman for London-based Prudential Plc declined to comment.

Strengthening Confidence

“AIG believes in strong regulatory oversight,” said Jon Diat, a company spokesman. “AIG works closely with various regulators and believes such oversight strengthens the safety and security of the financial system and people’s confidence in it.”

The association said supervisors will be notified confidentially, starting next year, about loss-absorbency figures, and that standards will be reviewed annually. Insurers’ requirements won’t necessarily match 10 percent as companies have “different risk profiles and business models, so there is variation,” the group said.

“This is the next step in a journey that the IAIS commenced in 2013,” John Maroney, chair of the IAIS capital development working group, said in a conference call Monday. “The journey will continue for several years as we approach 2019,” which is the date that the higher loss-absorbency standard is due to be implemented.

The roster of too-big-to-fail global insurers isn’t fixed, and an updated list is expected sometime next month, according to Maroney. The decision on the globally systemic status of reinsurers has been postponed to allow regulators to consider the particular features of those companies, according to a fact sheet provided by the IAIS.

The IAIS is an organization of supervisors and regulators in almost 140 countries. Established in 1994, the association is a member of the Financial Stability Board.

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