On July 18, 2013, the Financial Stability Board (FSB) identified the following companies as global systemically important insurers (G-SII):
- Allianz SE
- American International Group, Inc.
- Assicurazioni Generali S.p.A.
- Aviva plc
- Axa S.A.
- MetLife, Inc.
- Ping An Insurance (Group) Company of China, Ltd.
- Prudential Financial, Inc.
- Prudential plc
FSB identified the G-SIIs using a methodology developed by the International Association of Insurance Supervisors (IAIS). This methodology is based on a policy framework created by the FSB and endorsed by the G-20 leaders in November 2010 for identifying systemically important financial institutions (SIFI), including banks, and, in particular, global systemically important financial institutions (G-SIFI). The FSB has described G-SIFIs as institutions whose disorderly failure, because of their size, complexity, and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity. G-SIIs are an insurance subset of G-SIFIs.
The FSB has indicated it will update the list of G-SIIs annually based upon new data. The list will be published each November, beginning in 2014.
Reinsurers were not considered in this initial determination. Consideration of G-SII designations for reinsurers was deferred until July 2014.
Background On The Financial Stability Board
The original mandate that eventually led to the creation of the FSB was given to the Financial Stability Forum by the Finance Ministers and Central Bank Governors of the Group of Seven in 1999. Subsequently, the charter of the FSB was reinstated in 2009 by the G-20. The objectives of the FSB are set forth in Article I of its charter: “The [FSB] is established to coordinate at the international level the work of national financial authorities and international standard setting bodies (SSBs) in order to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies.”
The U.S. is a member of the G-20 and is represented on the FSB by the Board of Governors of the Federal Reserve System, the Securities & Exchange Commission and the U.S. Department of Treasury. No U.S. insurance regulators are a member institution of the FSB. Twenty-four countries participate in the FSB as well as numerous international organizations and standard-setting bodies, such as the International Monetary Fund, the Basel Committee on Banking Supervision and the IAIS.
The FSB establishes principles and standards, publishes reports, and issues consultation papers. As an example, on July 17, 2013, the FSB released a consultative document “Principles for an Effective Risk Appetite Framework.” According to the FSB, an effective risk appetite framework is important for firms and supervisors. The consultation sets out key elements for an effective risk appetite framework, an effective risk appetite statement, risk limits, and defining the roles and responsibilities of the board of directors and senior management. The FSB is not a regulator, but it supervisors to have discussions with financial institutions about changes to the risk appetite framework, breaches in risk limits, and significant deviations from the approved risk appetite statement as well as any material risks that the risk appetite framework does not adequately address.
The FSB issues consultation documents and guidance on many other topics. On July 16, 2013, the FSB released three guidance papers on the recovery and resolution planning for SIFIs: “Key Attributes of Effective Resolution Regimes for Financial Institutions,” “Guidance on Identification of Critical Functions and Critical Shared Services” and “Guidance on Recovery Triggers and Stress Scenarios”
The FSB issues progress reports to world leaders. On April 15, 2013, it issued a report to the G-20 Finance Ministers and Central Bank Governors on the progress of resolution regimes and resolution planning for G-SIFIs, “Implementing the FSB Key Attributes of Effective Resolution Regimes – how far have we come?”
The FSB also designates global systemically important banks (G-SIBs). The FSB has identified 28 G-SIBs as of November 2012.
Assessment Methodology and Policy Measures for G-SIIs
On July 18, 2013, the IAIS released its methodology for identifying G-SIIs and policy measures for enhanced supervision and other regulatory requirements. Increasing the intensity and effectiveness of supervision to reduce the moral hazard of SIFIs is a key component of the FSB’s framework.
The IAIS developed an assessment methodology which it used to assess the systemic importance of insurers. It did so in accordance with a framework established by the FSB in 2010. Increasing the intensity and effectiveness of supervision to reduce the moral hazard of SIFIs is a key component of the FSB’s framework.
Recognizing that insurance is different from other sectors, the IAIS methodology was developed specifically for the insurance industry. Five factors are used to measure relative systemic importance: (1) non-traditional insurance and non-insurance (NTNI) activities; (2) interconnectedness; (3) substitutability; (4) size and (5) global activity. There are 20 specific indicators within those categories that are also considered, such as non-policyholder liabilities and non-insurance revenues, derivative trading, and variable products with minimum guarantees.
The methodology was applied to year end 2011 data that was collected from select insurers in 2012. The methodology has been described as involving an assessment of such data, supervisory judgment and a validation process.
Under the purview of the FSB, the IAIS also developed a framework of policy measures for G-SIIs. According to a paper released July 18, 2013, by the IAIS, “Global Systemically Important Insurers: Policy Measures,” the IAIS policy measures comport with the FSB framework to: (1) apply more intensive and coordinated supervision of SIFIs; (2) improve the ability to resolve SIFIs in an orderly manner without destabilizing the financial system or increasing taxpayers’ exposure to loss; (3) require higher loss absorption (HLA) capacity for SIFIs to reflect the greater risks that these institutions pose to the global financial system; and (4) apply other supplementary prudential and regulatory requirements as determined in conjunction with national authorities.
The IAIS policy measures for G-SIIs are additional regulatory requirements, and include the following:
- Enhanced Supervision - This includes having a group supervisor with direct power over holding companies. G-SIIs would have to develop a systemic risk management plan, the purpose of which is to describe how the G-SII will manage, mitigate and possibly reduce its systemic risk. Enhanced liquidity planning and management will also be required. The group supervisor will oversee the structural separation, if necessary, of non-financial activities.
- Effective Resolution - G-SIIs are to establish a Crisis Management Group, develop recovery and resolution plans, conduct resolvability assessments, and adopt institution-specific cross-border cooperation agreements. The IAIS has indicated that effective resolution of a G-SII will have to include plans for separating NTNI activities from traditional insurance activities; the possible use of portfolio transfers and run-off arrangements as part of the resolution of entities conducting traditional insurance activities; and consideration of the existence of policyholder protection and guarantee schemes.
- HLA Capacity - The IAIS’s goal is to finalize backstop capital requirements to apply to all group activities, including non-insurance subsidiaries by the end of 2014. G-SIIs should have HLA capacity for conducting NTNI activities. How the HLA is calculated may depend on the extent to which NTNI activities are separated from traditional insurance activities within the group.
Neither the IAIS nor the FSB has any direct regulatory authority over the G-SIIs. Regulatory bodies with such authority are expected to coordinate the implementation of such policy measures and enhanced supervision.