While the US’s Financial Stability Oversight Council (FSOC) has been working on a methodology to identify potential systemically significant non-bank financial institutions (which may include large insurance companies) for potentially enhanced regulation, a similar effort has been underway on the international front. The International Association of Insurance Supervisors (IAIS) has released a document containing its proposed methodology for identifying such companies, titled Global Systemically Important Insurers: Proposed Assessment Methodology, which is open for comment through July 31, 2012. Since the IAIS does not have direct regulatory authority, its work will result in recommendations for consideration by the national regulatory authorities.
The IAIS has recognized that “traditional insurance” generally neither generates nor amplifies systemic risk within the financial system, but that there is a potential for systemic risk in insurance companies when they “significantly deviate from the traditional insurance business model and particularly where they engage in non-traditional insurance or noninsurance activities or as a result of interconnectedness.”
The IAIS’s proposed methodology for identifying significant insurers is similar to, but not the same as, the methodology published by the FSOC, and consists of five “indicator” categories of potential systemic risk: size; global activity; interconnectedness; nontraditional and non-insurance activities; and substitutability. In the non-traditional and non-insurance activities category, the issuance of variable annuities with guaranteed benefits can introduce systemic risk.
It is anticipated that insurers identified as being “significant” risks will be required to have a “Recovery and Resolution Plan” in place by mid-2014, with additional regulatory measures to follow starting in mid-2017 at the earliest.