Nine large global insurers are learning to operate as global systemically important insurers (G-SIIs) after the Financial Stability Board (FSB) assigned them this designation last July, and we should hear in November whether the FSB will add any reinsurers to the list. While being a G-SII comes with additional oversight and potentially higher capital requirements, no rating actions (in either direction) have resulted from the designation thus far. But Standard & Poor’s Ratings Services believes that classification as a G-SII may have longer-term credit consequences for these insurers, both positive and negative. We recognize that large insurers are systemically important because of the role they play in the financial system. However, we question whether their potential failure poses a systemic risk in the same way that most large banks’ would. As such, the question becomes whether naming certain insurers as G-SIIs enhances financial stability and warrants the resulting costs to insurers and their regulators.
Can Insurers Be “Too Big To Fail”? We acknowledge that large insurers are systemically important to the financial system. In particular, their willingness and ability to hold investments to maturity and avoid forced selling means that they dampen volatility in the financial markets. But in light of this role, we question whether insurers pose a systemic risk in the way of
“Systemic risk was more evident in insurance at a national, rather than global, level during the financial crisis.”
generally aren’t necessary when resolving insurers because, relative to banks, they have low financial leverage, lower liquidity risk, low interdependency, and extensive use of subsidiaries (rather than branches). The infrequency of insurer bailouts historically bears this out.
most large banks. It may be that the FSB would never have pursued the G-SII regime were it not for AIG’s failure—a failure that resulted, in our view, from its shadow banking activities, which other insurers largely avoided.
Insurers generally weathered the financial crisis well (see “What May Cause Insurance Companies To Fail—And How This Influences Our Criteria,” published June 13, 2013), as our ratings on the nine G-SIIs’ core operating subsidiaries reflect: These ratings fell by just over one notch, on average (see Table 1). Generali’s rating transition also incorporated the subsequent sovereign rating downgrades on Italy. In our view, the G-SIIs generally aren’t too big to be allowed to fail because we believe it’s possible to resolve their liabilities post-failure without disrupting the financial system and without the injection of taxpayers’ money. Capital injections
Table 1: Rating Changes For The Nine G-SIIs’ Core Operating Subsidiaries G-SII AIG
Allianz
Generali Aviva Axa
MetLife Ping An§
Prudential Financial Prudential PLC
Jan 1, 2007 AA+/Stable AA-/Stable AA/Stable AA-/Stable AA-/Stable AA/Stable Not rated
AA-/Positive AA+/Stable
We believe that systemic risk was more evident in insurance at a national, rather than global, level during the financial crisis, when U.S. bond and mortgage insurance and trade credit insurance in some European markets posed systemic concerns. We further believe that the creation of G-SIIs could divert regulatory resources toward these entities while more risk accumulates at the non-G-SIIs.
The insurance industry did persuade the FSB that the traditional insurance business model was not systemically risky. However, the G-SII assessment framework, which the International Association of Insurance Supervisors (IAIS) designed on the FSB’s behalf, emphasized insurers’ interconnectedness with the financial sector as well as nontraditional noninsurance (NTNI) activities that were broad in scope and included many activities that are typical of life insurers. Although the IAIS framework did not emphasize size and global reach, the G-SIIs emerging from the assessments are nine of the largest global providers of life insurance. The evidence suggests to us a political dimension to the designation process.
Low point A/Negative* AA-/Negative A-/Watch Neg A+/Stable A+/Stable
AA-/Watch Neg A/Watch Neg AA-/Stable
AA/Watch Neg
May 20, 2014 A+/Stable AA/Stable
A-/Negative A+/Stable A+/Stable AA-/Stable A/Negative AA-/Stable AA/Stable
Ratings relate to the core operating subsidiaries of these groups. *Core P/C subsidiaries only, core life subsidiaries ‘A+’. §Ping An Property & Casualty Insurance Co. of China Ltd. G-SII = Global Systemically Important Insurer. P/C = Property/casualty
Global Reinsurance Highlights 2014 51
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