Industry Trade Groups Question ‘Horse-Before-Cart’ IAIS New Global Insurance Surcharge
October 6, 2015 by Frank Klimko, Washington correspondent, BestWeek: frank.klimko@ambest.com
WASHINGTON – The International Association of Insurance Supervisors proposed a 10% average capital requirement surcharge for the largest globally active insurance companies, including American International Group, Inc., and MetLife Inc., as part of a regulatory effort to prevent another worldwide financial crisis. However, insurance companies and trade groups have questioned the practicality of releasing the standards when the IAIS has delayed the approval of the quantitative capital standards.
The IAIS released the new Higher Loss Absorbency standards Oct. 5 at a press conference in Basel, Switzerland. The HLA surcharge would be up to 18.75% for large insurers engaged in risky financial practices, but much lower, about 6% for companies selling traditional insurance products.
“For most lines of business there is little evidence of traditional insurance either generating or amplifying systemic risk within the financial system or in the real economy,” the IAIS said in a report that accompanied the new HLA standards.
“A benign record in the past does not ensure the absence of a systemic risk potential in the future,” the IAIS said. “The potential for systemic risk in insurance may become relevant where insurers significantly deviate from the traditional insurance business model and particularly where they engage in nontraditional insurance or non-insurance activities.”
The quantitative standards will apply to large international insurers (about 50) while the HLAs are reserved for the approximately nine companies identified as global systemically important insurers (Best’s News Service, Sept. 3, 2015).
The HLA is a surcharge that will be placed on top of a calculation based on each company’s basic capital requirement. Both will act as financial cushions in case of some economic calamity. The 10% average surcharge is less than the 12.5% average HLA standard that IAIS had previously considered.
IAIS officials said the HLAs are not a one-size-fits-all standard. Companies that engage in nontraditional, non-insurance financial activities would be forced to meet the higher capital standards. Nontraditional insurer activities could amplify systemic risk under specific circumstances, such as reacting to a sudden market downturn or the unexpected withdrawal of capacity, officials said.
The Property Casualty Insurers Association of America was disappointed the IAIS published the HLAs without updating the metrics of what activities could get companies into trouble.
“We had felt it was appropriate for them to wait until they finished the redefinition process for nontraditional/non-insurance (activities) and the GSII determination process before moving ahead with this,” Steve Broadie PCI’s vice president, financial policy, told Best’s News Service.
Neil Alldredge, National Association of Mutual Insurance Companies senior vice president of state and policy affairs, agreed. Alldredge was in Basel for the IAIS stakeholders meeting.
“NAMIC remains concerned about many aspects of the efforts to create a higher loss absorbency for GSIIs and its potential to impact the broader industry,’ Alldredge told Best’s News Service. “The IAIS admits that the HLA will have to be changed once (or even if) an international capital standard is created.”
“We question this cart before the horse exercise,” Alldredge said. “Furthermore, the HLA is based on many assumptions, including averaging some aspects of the calculation that raise serious concerns. Several organizations, including increasingly the regulators themselves, are questioning if an international capital standard can even be created.”
The HLAs are to be formally adopted in November, but the IAIS doesn’t plan to implement it until 2019, giving regulators a chance to fine-tune the requirements.
Globally active MetLife has also been selected by U.S. regulators as a systemically important financial institution, which is the American counterpart of the GSII designation.
Randy Clerihue, a spokesman for MetLife, told Best News Service the company welcomed the implementation delays that the IAIS and the Financial Stabilty Board had built into the adoption schedule.
“MetLife is pleased that the FSB and IAIS acknowledge that the HLA needs further revision,” Clerihue said.
“There must be significantly more research to understand what, if any, systemic risks can be associated with the business of life insurance,” Clerihue said. “Until that work is completed, higher capital requirements will only raise costs for consumers while failing to achieve the goal of reducing risk in the financial system.”
AIG, also a SIFI, said it will continue to work with regulators.
“AIG believes in strong regulatory oversight,” said Jon Diat, AIG vice president, external communications/media relations. “AIG works closely with various regulators and believes such oversight strengthens the safety and security of the financial system and people’s confidence in it.”