Insurers seek softening of “too big to fail” criteria

Thursday, 2 August 2012 00:00 - - {{hitsCtrl.values.hits}}

LONDON (Reuters): Proposed criteria for deciding whether an insurer is so big it could destabilise the financial system if it collapsed are too onerous and should be changed, a top insurance industry think-tank and lobby group said on Tuesday.

The Geneva Association said that the criteria drawn up by the International Association of Insurance Supervisors (IAIS), the global regulatory body, in May do not give big insurers enough credit for reducing risk by diversifying across countries and businesses.

“The insurance business is based on the law of large numbers - the larger number of units that you insure, the lower the volatility of the portfolio,” Geneva Association Secretary General John Fitzpatrick told Reuters.

“We know that if we add more size or diversify by line of business or geography, it further reduces risk. So rather than these being indicators of systemic risk, we think they’re indicators of stability and strength.”

Under the IAIS criteria, whether an insurer is categorised as posing a potential threat to the financial system depends on five factors: size, global activity, interconnectedness, non-traditional activities and substitutability.

Insurers deemed to be high-risk could be forced to hold extra capital under safeguards being drawn up by financial regulators from the G20 group of nations tasked with preventing a rerun of the 2008 crisis.

A group of 48 big insurers will be examined to determine whether they should be placed alongside leading global banks on a list of “systemic” financial institutions, the G20’s regulatory task force, the Financial Stability Board, has said.

AIG, Allianz, Axa and Prudential are all seen as potential candidates for inclusion on the list.

Insurers maintain that they are fundamentally less risky than banks because they do not lend money and should therefore be exempt from any additional capital requirements imposed on the banking sector.