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Categorized | Insurance

Insurers warn on ‘too big to fail’ plans

Posted on July 31, 2012

Regulators’ plans to designate big global insurers as too big to fail could have unintended consequences that risk “destabilising the financial system”, an industry body has claimed.

In a sign that insurers are stepping up their lobbying against the proposals, the Geneva Association said they might prompt insurers to cut holdings of government bonds as well as bank debt and equity.

    The body urged regulators to change draft criteria used to determine whether they regard an insurer as posing a potential threat to the financial system and global economy.

    The International Association of Insurance Supervisors is targeting 48 international insurance groups for possible designation as systemically important, which could lead to higher capital requirements and limits on their business.

    Banking supervisors have already deemed 29 institutions systemically important after examining more than 70, imposing capital surcharges on them.

    The IAIS plans to consider five factors: size, global activity, interconnectedness, non-traditional activities and substitutability.

    The mooted process will give greatest consideration – up to half the total – to the amount of non-traditional business, such as derivatives trading and variable annuities, the insurers conduct.

    Still, the Geneva Association said on Tuesday: “The current inclusion of traditional insurance activities in ‘large exposures’ means that the considerable holdings of government bonds and bank-issued securities owned by insurers would be subject to this indicator.

    “In order to manage their systemic risk ranking, insurers may seek to adjust their holdings in these important assets, making it harder for banks and governments to re-finance.”

    The association, which calls itself a think tank, is wholly funded by the insurance industry.

    Insurers have long maintained that they are fundamentally less risky than banks, with entirely different business models. Their investment decisions are keenly watched given that they are among the world’s biggest institutional investors.

    In Europe alone, the sector’s total holdings come to about €7.4tn, according to the CEA, the industry body.

    Insurers hold two-thirds of their assets in fixed income securities, with corporate bonds accounting for 38 per cent and government debt 28 per cent, according to a study by Blackrock earlier this year.

    The move to determine whether institutions are too big to fail and impose additional regulations on them is part of an effort by the Group of 20 leading nations to prevent a repeat of the 2008 financial crisis.

    As well as the collapse of several banks, the crisis also resulted in the US government rescue of AIG, previously considered one of the world’s strongest insurers.

    The International Association of Insurance Supervisors has conducted a two-month consultation on its proposed methodology. The deadline for submissions was Tuesday. It declined to comment.