Big insurers face curbs on risky activities

LONDON Thu May 31, 2012 10:47am EDT

LONDON May 31 (Reuters) - Top insurers face curbs within five years on risky "non-traditional" activities, global regulators said on Thursday as they seek to avoid a repeat of AIG's huge taxpayer bailout in the financial crisis.

Leaders of the world's top 20 economies (G20) have asked the industry's regulators to design tighter supervision for big insurers that pose risks to the wider financial system.

Generali, AIG, Axa, Prudential and Allianz are seen as candidates for inclusion on a list of "systemic" insurers that the G20's regulatory task force, the Financial Stability Board (FSB), will publish next year. Forty-eight big insurers will be examined to see if they should be on the FSB list.

The International Association of Insurance Supervisors (IAIS) is helping the FSB and explained on Thursday how it will select insurers that will face a combination of extra controls such as more reporting requirements or extra capital buffers.

Selection will be based on five factors: size, global activity, interconnectedness, non-traditional activities, and substitutability, or whether a firm has a big part of the market that cannot be filled easily by another company.

The G20 initiative is part of a global response to the financial crisis and a list of top banks facing extra supervision and capital requirements from 2016 has already been published.

Many big insurers may get off lightly in comparison.

"Neither long experience of insurance markets nor information arising from the global financial crisis provides any evidence of traditional insurance either generating or amplifying systemic risk within the financial system or the real economy," the Swiss-based IAIS said.

"The potential for systemic importance is only considered to arise in any non-traditional or non-insurance activities which may be undertaken by a small number of insurers," it added.

DISINCENTIVE

IAIS chairman Peter Braumueller told reporters there was a need to ensure that purely traditional insurers were not penalised as they can play a stabilising role in rocky markets.

He signalled that many insurers have scaled back or ditched non-traditional activities so there would "not be too high a number" of companies on the FSB's list next year.

There was still some disagreement among supervisors over the need for extra capital on some firms or on slapping a high risk weighting on products like variable annuities when it comes to determining which company goes on the FSB list.

The list will be reviewed annually to catch any insurer that is becoming systemic.

"There should generally be a sufficient disincentive to moving to being more globally systemically relevant," Braumueller said.

Supervisors in some countries won't have powers to directly curb or ban risky activities and could therefore use indirect incentives to scale them back.

Non-traditional activities would include non-policyholder liabilities, derivatives trading, short-term funding, financial guarantees and variable annuities.

AIG, the U.S. insurer nearly collapsed in 2008 and was shored up with $182 billion of taxpayer money. The company had written derivatives known as credit default swaps for more than $440 billion in bonds but did not have enough money to cover claims on them.

Swiss Re, the world's second-biggest reinsurer, took an emergency loan from billionaire U.S. investor Warren Buffett after losing 1.2 billion Swiss francs in 2007 on credit default swaps it had written.

Restricting such activities would be the best way to curb systemic risks. "The preference for the IAIS would be for incentive-based measures over prohibitions," it added.

Insurers say AIG was an exception and argue they pose no threat to financial stability because they are not exposed to credit risk and cannot face demands to return customers' cash overnight, unlike banks.

Concerns about how easily an insurer can be replaced by rivals if it goes bust arose following the collapse in 2001 of Australia's HIH, which triggered a scarcity of builders' warranty cover, a market HIH had dominated.

The IAIS said insurers will have to have recovery and resolution plans - also known as living wills or death plans - by mid-2014. They spell out what happens if the company gets into trouble.

Any other supervisory requirements, such as extra capital, would start from mid-2017 at the earliest.

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