Too-Big-to-Fail Insurers to Face Tougher Capital Standards

Global insurers identified as too big to fail will have to hold higher reserves and draw up recovery and resolution plans to limit the economic fallout should they go bust, the industry’s watchdog said.

The International Association of Insurance Supervisors, which collected data from 50 insurers in 14 jurisdictions, including the U.S., to help the Financial Stability Board draw up a list of systemically important firms, released its assessment methodology and policy measures today. The list of insurers will be announced by the Basel, Switzerland-based FSB in coming days.

The FSB, led by Bank of England Governor Mark Carney, is coordinating global regulators’ response to the worst financial crisis since the Great Depression to prevent a repeat of the turmoil that followed the collapse of Lehman Brothers Holdings Inc. and bailout of American International Group Inc.

“Since the financial crisis, supervisors across the sector have worked diligently to address risks to the global financial system from systemically important financial institutions,” Peter Braumueller, chair of the IAIS executive committee, said in a statement. “The measures and framework put forward by the IAIS today complete a major piece of this reform in a manner specifically designed for the insurance sector.”

The companies on the FSB insurer list will be included based on criteria such as size, global activity and the amount of non-insurance businesses they have. The designation of systemically important means the failure of the company could threaten the financial system.

Crisis Losses

The IAIS would impose tougher capital standards on the systemically important insurers to increase their capacity to absorb losses and require them to design recovery and resolution plans to meet cases of severe financial distress. The FSB said in June it will follow up next year with a list of too-big-to-fail reinsurers.

Insurers and reinsurers globally, led by New York-based AIG and Ambac Financial Group Inc., posted about $231 billion in writedowns and credit losses from the financial crisis, compared with $1.51 trillion from banks and brokers worldwide, according to data compiled by Bloomberg. Losses in AIG’s London-based financial products unit forced the company to seek a record bailout from the U.S. government.

The IAIS said non-traditional activities, including alternative risk transfers such as insurance-linked securities and financial guarantee insurance, as well as capital-markets businesses, banking, third-party asset management and industrial activities, are deemed the most risky and are the most important categories for assessing the systemic importance of an insurer. The firm’s interconnectedness was the next most significant consideration, the watchdog said.

The IAIS has said that traditional insurance and reinsurance are unlikely to cause or amplify systemic risk.

In November 2011, the Group of 20 nations endorsed the FSB’s policy measures on global systemically important financial institutions and published a list of too-big-to-fail banks.

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