Big insurers may escape capital surcharges from global regulators

Tue Aug 16, 2011 5:58am EDT

* Rules likely to be drawn up next year

* Focus on insurers engaged in "non-traditional" activities

* Possible that no insurers classed as risk to finance system

By Noriyuki Hirata and Rachel Armstrong

TOKYO/SINGAPORE Aug 16 (Reuters) - New rules to ensure no insurance company is too big to fail are set to be drawn up in time for the 2012 meeting of G20 leaders, although unlike banks they may not include capital surcharges, according to industry supervisors.

The proposed new rules, which the International Association of Insurance Supervisors (IAIS) is helping to draw up for the Financial Stability Board (FSB), are aimed at preventing a repeat of the problems seen at insurer AIG , which required a rescue by the U.S. government during the 2008 financial crisis.

The FSB and Basel Committee on Banking Supervision set out their plans in July to boost the loss absorbency capacity of the world's largest banks through capital surcharges, but said work on other financial firms, including insurers, was ongoing.

Yoshihiro Kawai, secretary general of the IAIS, told Reuters that it would be likely that the measures for determining if any insurers are global systemically important financial institutions (G-SIFIs) and how they should be regulated would be finalised in time for the G20 meeting in Mexico next year.

"We've had discussions with the FSB and they have agreed we can develop our policy measures as well as indicators and methodologies to assess which insurers are G-SIFIs, if any, by sometime next year," he said via a telephone interview.

CAPITAL SURCHARGES

Insurers judged to be systemically important may not be subject to the type of capital surcharges imposed on banks.

A source at a national regulator told Reuters that supervisors are not yet clear whether the capital surcharge is necessary to try to curb the risks to the financial system posed by large insurers.

The source said that since insurers do not pay out money until there has been some kind of accident, disaster, injury, or death, regulators recognize that they cannot be subject to a run on their money in the same way as banks.

The IAIS's Kawai said no decision has yet been made, but that there are other criteria likely to be more important than capital surcharges to bolster the regulation of systematically important insurers.

"There are three important policy measures for G-SIFIs. One is higher loss absorbency (capital surcharges), another is intensity of supervision and the third one is the resolution regime. There should not be any institution which is too big to fail," he said.

"I think the last two measures, resolution regimes and intensity of supervision, may apply to insurance G-SIFIS, if any, in particular."

IDENTIFYING THE INSURERS

Kawai said the differing business model of insurance compared to banking means criteria used to determine which insurers are systemically important would be different to that used for banks.

The source at the national regulator said that after the restructuring of AIG there might be no insurers which at present meet the criteria of being globally systemic. As a result, the new rule might be just preventative.

Kawai said the criteria are yet to be decided, but added that the focus is likely to be on the extent to which an insurer is engaged in non-traditional forms of the business such as credit default swaps and other credit-related insurance activities.

"Generally speaking if insurance companies operate a traditional business, we are convinced that they do not create systemic risk," he said.

"The key issue is how much non-traditional business they are carrying on and that is an important factor to assess the systemic relevance of insurance," he said. (Reporting by Noriyuki Hirata and Rachel Armstrong)

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