Insurers battle to escape bank-style capital rules

LONDON Tue Dec 11, 2012 3:48am EST

LONDON Dec 11 (Reuters) - Insurers are smaller than banks and less intertwined with the global economy, according to a study aimed at convincing regulators to exempt the sector from tough new capital requirements being imposed on the banking industry.

The world's 28 biggest banks on average hold $1.5 trillion of assets, nearly four times as much as the average of the 28 top insurers, according to the study, published on Tuesday by the Geneva Association, an insurer-funded think tank.

The biggest banks have also sold 158 times as much protection through credit default swaps, securities that shield investors from non-payment of debt, magnifying the potential consequences if they go bust, the Association said.

The study forms part of an insurance industry effort to deflect capital penalties that global regulators plan to impose on big banks to limit the impact of them going bust and prevent a repeat of the 2008 crisis.

Regulators from the G20 group of countries have accepted that traditional insurance poses no threat to the financial system, but could still force insurers involved in risky activities beyond their core business, such as derivatives investment, to hold extra capital.

Although insurers emerged from the 2008 meltdown in better shape than banks, AIG of the United States and Swiss Re both had to seek emergency finance after absorbing heavy losses from credit default swaps they had sold. Some insurers in the Netherlands also required bailouts.

Insurers argue they are fundamentally less risky than banks because they do not lend and their customers cannot withdraw their cash overnight. Imposing excessive constraints on the sector could reduce the amount of insurance available, holding back global growth, the Geneva Association said in its study.

The International Association of Insurance Supervisors (IAIS) is expected early next year to publish a list of insurers that it considers big enough to pose a potential threat to the financial system.

The Geneva Association study, based on data from insurers including Axa, MetLife, Berkshire Hathaway , and Tokio Marine, also concluded that banks have 11 times as many liabilities to other financial institutions as insurers.

The 2008 crisis, triggered by a drying-up of interbank lending amid worries over the sector's exposure to distressed mortgage-backed assets, was exacerbated by close links between financial institutions which prompted a domino effect of failures.

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