G20 rules for big insurers to guard against arbitrage

(Reuters) - New rules to ensure no insurance company is too big to fail must guard any against any potential "regulatory arbitrage" between insurers and banks, a top industry supervisor told Reuters on Friday.

Insurance companies have objected to the prospect of facing the type of capital surcharges and extra layers of supervision imposed on the world's systemically important banks, arguing they did not cause the 2008 financial crisis.

Yoshihiro Kawai, secretary general of the International Association of Insurance Supervisors (IAIS), said no decision has been made on whether to include capital surcharges in the regulatory framework for systemically important insurers due by the end of this year.

But he indicated regulators are keen to avoid running the risk of pushing some banking activity into the insurance sector to avoid heavier banking sector rules.

"Naturally insurance and banking are very different business models, but regulatory arbitrage should be avoided between the banking and other financial sectors and banking already has a capital surcharge," said Kawai on a phone interview from his office in Basel, Switzerland.

"So that's an issue we are debating, hopefully we will reach our conclusion by the time of October when we report our final thoughts to FSB (Financial Stability Board),."

The IAIS is helping draw up the framework on behalf of the FSB with the aim of preventing a repeat of the problems at American International Group Inc, which was bailed out by the U.S. government during the financial crisis and is still majority owned by taxpayers.

Kawai said the FSB would issue a consultation on how to decide which insurance companies would be subject to the rules and how they should be supervised during March.

He added though it is still not a foregone conclusion whether any insurer in the world would be judged too big to fail.

"We don't know if there are any global systemically important insurers, but if any are under the judgment of the FSB and national authorities, then they are likely to announce it in this November," he added.

The world's biggest insurers by market capital include Berkshire Hathaway, China Life Insurance Company, Allianz and Axa SA. Rules to decide which are too big to fail are likely to look at how internationally interconnected a company is, rather than just its size.

Capital surcharges of 1 to 2.5 percent for the world's biggest banks were approved last November and the FSB is aiming to have all the framework for insurers and large, systemically important domestic banks finalized in time for the Group of 20 leading economies' meeting in Mexico at the end of this year.

(Reporting by Rachel Armstrong in Singapore; Editing by Huw Jones and David Holmes)