Identifying and supervising Global Systemically Important Insurers

1. Identifying and supervising Global Systemically Important Insurers Yoshihiro Kawai Secretary General International Association of Insurance Supervisors Santiago de Chile 19 November 2013

2. Outline • Relevance • Background • What are G-SIFIs? • Role of insurance in financial stability • Global Systemically Important Insurers (G-SIIs) • Designation • Policy measures • Conclusion

3. 1. Relevance • G-SII policy measures have impact on host jurisdictions • G-SII policy measures will be a basis for domestic SIIs discussions in coming months • G-SII policy measures spillover into IAIG policy measures (resolution issues, capital standards, group wide supervision) • Hence: G-SII policy measures are also relevant for jurisdictions where no G-SII is domiciled.

4. Outline • Relevance • Background • What are G-SIFIs? • Role of insurance in financial stability • Global Systemically Important Insurers (G-SIIs) • Designation • Policy measures • Conclusion

5. 2. Background: What are G-SIFIs? • What are G-SIFIs (Global Systemically Important Financial Institutions) ? • Lehman Brothers failure in September 2008 • Government rescues of financial institutions • Why are G-SIFIs important?  

6. Outline • Relevance • Background • What are G-SIFIs? • Role of insurance in financial stability • Global Systemically Important Insurers (G-SIIs) • Designation • Policy measures • Conclusion

7. 2. Background: Role of insurance in financial stability (i) • Differences exist between traditional insurance and banking business, e.g. - Banking business has inherent maturity mismatch - Insurance underwriting risks largely not correlated with economic business cycle - Cash outflows can occur over long periods of time • The unique insurance business model helps insurance firms to withstand systemic risk better than banks. • However….

8. 2. Background: Role of insurance in financial stability (ii) • Insurance sector is susceptible to systemic risk generated in other parts of the financial sector • Insurers may amplify risk under specific circumstances • Non-traditional insurance and non-insurance activities within insurance groups may generate or amplify systemic risk.

9. Outline • Relevance • Background • What are G-SIFIs? • Role of insurance in financial stability • Global Systemically Important Insurers (G-SIIs) • Designation • Policy measures • Conclusion

10. IAIS indicator-based assessment approach • IAIS agreed an indicator-based assessment approach similar to the G-SIBs (Global Systemically Important Banks) methodology but with differences to reflect the insurance business model - Instead of the G-SIB ‘complexity category’, a specific ‘Non-Traditional and Non-Insurance (NT-NI) category - Higher weighting for NT-NI and interconnectedness

11. G-SIIs: Assessment methodology (i) • 20 indicators in 5 categories: size,global activity, interconnectedness, Non-Traditional insurance and Non-Insurance (NTNI) activities and substitutability • In total 50 firms from 14 jurisdictions were included in the data call

12. G-SII: Assessment methodology (ii)

13. G-SIIs: NTNI (Non Traditional and Non Insurance) • Traditional Non-traditional • Underwriting • Insurance • Variable annuities • Trade credit insurance • Mortgage guarantee insurance • Alternative risk transfer (ART) • Financial guarantee insurance • Finite reinsurance • Most life and non-life (re)insurance business lines • Investments and funding activities • Proprietary investment function (ALM) • Funding through equity and debt issues; incl. securities lending • Proprietary and derivatives trading (non ALM related) • Synthetic investment portfolios • Embedded Value securitisations • Excessive repos and securities lending • Non- • insurance • Capital market business • CDS/CDO underwriting • Banking, incl. Investment banking and hedge fund activities

14. G-SII: Assessment methodology (iii) • First cohort of G-SIIs (in alphabetical order): • 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

15. Outline • Relevance • Background • What are G-SIFIs? • Role of insurance in financial stability • Global Systemically Important Insurers (G-SIIs) • Designation • Policy measures • Conclusion

16. Objectivesof G-SII policymeasures • G-SII policy measures should: • Reduce moral hazard from the failure of a G-SII • Reduce negative externalities from the failure of a G-SII, • Reduce the probability and impact of default of G-SIIs • Incentivise G-SIIs to become less systemically important

17. G-SIIs: Policy framework • Enhanced supervision • Effective resolution • Higher loss absorbency

18. G-SIIs: Policy framework • Enhanced supervision • Systemic risk management plan (SRMP) • Group-wide supervision • Liquidity management

19. G-SIIs: Policy framework • Effective resolution • Crisis management groups (CMGs) • Recovery and resolution plans • Resolvability assessments • Institution specific cross-border cooperation agreements

20. G-SIIs: Policy framework • Higher loss absorbency (HLA) • Step1: Develop straightforward backstop capital requirements by September 2014 as a basis • Step 2: Development of HLA by the end of 2015 and full implementation by 2019

21. G-SIIs: Time frame

22. Outline • Relevance • Background • What are G-SIFIs? • Role of insurance in financial stability • Global Systemically Important Insurers (G-SIIs) • Designation • Policy measures • Conclusion

23. Conclusion G-SII policies – catalysts for developments on global standard setting Importance for both home and host supervisors Tight deadlines for both development and implementation IAIS commitment to develop and implement solid policy measures for G-SIIs with tight deadline

24. Thank you very much • www.iaisweb.org • yoshihiro.kawai@bis.org