REGULATORY UPDATE
Domestic SII (D-SII) regimes are operating or under development in some jurisdictions as well. The U.S. system is the most advanced and currently designates two insurers as nonbank systemically important financial institutions under Federal Reserve Board supervision. The Fed’s assessment process differs from the FSB’s and views life insurance business as inherently more systemic. However, the end result is the same: The Fed considers two of the U.S.- based G-SIIs as D-SIIs; the remaining one (MetLife) is in the final stages of the process, and the regulator’s recent annual report indicates that it will likely receive the designation soon.
Our view of the systemic risk large insurance groups pose extends to large reinsurers, although we expect the FSB to name some reinsurers G-SIIs in November. The FSB has postponed the announcement of reinsurer G-SIIs twice, which may be indicative of differing views on the potential candidates. Our views of the relative systemic importance of banks and insurers are reflected in our ratings. We currently include one or two notches of systemic government support in our ratings on many large banks, including those the FSB has designated as global systemically important banks (G-SIBs), because we believe government support is likely in a time of stress. As a result of the emerging bank resolution regimes, we may remove some of that support from ratings in the U.S. and the EU (see “The Rating Impact Of Resolution Regimes For European Banks,” published April 29, 2014). We anticipate that governments would play a role in resolving failing G-SIIs (and D-SIIs), but don’t see the same incentive for governments to provide capital support to the insurance sector. Accordingly, we factor no government support into insurers’ ratings unless they are government-owned.
The G-SII Designation’s Consequences Are Unfolding
The policy measures under consideration for G-SIIs include heightened oversight, resolution plans, and capital loadings to absorb potential losses. The heightened oversight is already a reality. Lead supervisors for each G-SII have been identified—AIG’s lead supervisor, the Fed, has already allocated a dedicated staff of nine to the task—and “colleges” of most of the G-SIIs’ main supervisors are already in place. Insurers were required to submit
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published July 19, 2013 (under the heading “Standard & Poor’s differentiates between G-SIBs and G-SIIs in its analysis”). We also explained that while certain insurers benefited from government support during the financial crisis, we would not characterize these as “rescues” (under the heading “Evidence from the financial crisis underpins our analytical differentiation between banks and insurers”). In light of the lack of data on the cost of these resolutions in general and for taxpayers, it’s unclear to us how the IAIS will calibrate the G-SIIs’ capital loadings.
The Global Capital Standard May Be Beneficial In The End, But The Lead Time Is Short
“Widespread adoption of the ICS by countries or regions for all insurers over time would underscore its validity.”
detailed resolution plans to their group supervisor by July. Such plans may be useful to prepare a G-SII for certain stress scenarios it could face. Moreover, on behalf of the FSB, the IAIS will be developing an approach to capital loadings, also known as higher loss absorbency (HLA), in 2015. The need for capital loadings for G-SIIs is questionable, in our view. It’s understandable for banks, where recent empirical evidence has shown what a failure can cost taxpayers. This actual cost has informed the systemic capital loadings regulators have applied to banks. While insurers, including some large insurers, have failed in the past, their resolutions have generally come at limited cost to taxpayers, in our view. We explained why in “Possible Ratings Implications For Global Systemically Important Insurers,”
The FSB has advocated the development of a global insurance capital standard (ICS) similar to that for banks under Basel III. Its first application would be as a baseline for the capital loadings the G-SII regime requires. We view this as a beneficial development for the industry because there are dozens of different national or regional regulatory capital adequacy regimes in place around the world today, so the ICS framework could provide greater consistency. Widespread adoption of the ICS by countries or regions for all insurers over time would underscore its validity and could help even out the global competitive playing field. Furthermore, assuming that the ICS model is well designed and its outcomes are transparent, it would be valuable to investors and analysts. We would consider opportunities to refine our own capital adequacy analysis if an ICS were in place. However, the planned timing is aggressive, notably for the basic capital requirement (which is somewhat comparable to the leverage ratio applied to banks), which we expect the FSB to announce in November of this year (see “Proposed Capital Standard Further Complicates Insurers’ Regulatory Agendas,” published Oct. 24, 2013). While labeled “basic,” the methodology under consideration is not simple, in our view. The IAIS is working to meet this mandate at a time when most countries are updating their own insurance solvency regimes in significant ways (for example, the rollout of Solvency II in Europe and the Solvency Modernization Initiative in the U.S.). For the purpose of comparison, Solvency II has taken 15 years to develop so far, and Standard & Poor’s spends approximately one year to plan, design, and consult on its periodic updates of its capital adequacy model.
The IAIS has been set a demanding Global Reinsurance Highlights 2014
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