Comment: G-SII envy - next year’s big thing?

Comment: G-SII envy - next year’s big thing?

A list of the Global Systemically Important Insurers (G-SIIs) will be published in the first half of next year, and it’s causing the world’s biggest insurers to start worrying about the possible implications for them. That’s because the International Association of Insurance Supervisors (IAIS) has warned that it expects measures on enhanced supervision and the development of systemic reduction plans SRRP should begin to be implemented immediately afterwards.

Insurance groups chosen to be put on the “too big to fail list” will also be expected to put together potentially costly recovery and resolution plans detailing how they expect to wind down their business, ie make a ‘living will’. IAIS has said that the SRRP and measures on effective resolution should be completed within 18 months after designation.

Perhaps most significant, the IAIS is mandating a higher loss absorption capacity for each G-SIIs “that will help to reduce its probability of failure”.

The IAIS says this is important given the greater risks that the failure of G-SIIs poses to the global financial system. But insurance leaders are dismayed by the implication that they are as systemically risky as the banks – who got us into this mess in the first place.

Their resentment at having more costly compliance layered on top of other national and international regulation won’t be ameliorated by recent analysis carried out by the insurance think tank, The Geneva Association. It has published a cross-industry analysis that compares the named 28 Global Systemically Important Banks (G-SIBs) to 28 of the world’s largest insurers on indicators of systemic risk.

The Geneva Association’s analysis shows that insurers are simply not in the same global systemic league as banks are. Specifically, the data collected by the think-tank shows that:

- Insurers are significantly smaller than banks. The average bank’s assets are nearly four times larger than the average insurer and the largest insurer would rank alongside only the 22nd largest systemically important bank. Furthermore, as insurance liabilities are substantially matched against their assets, an insurance balance sheet is much less systemically risky than that of a bank of comparable size.

Insurers write considerably less credit default swaps than banks. The average bank writes 158 times the value of gross notional CDS than the average insurer. Even the lowest ranked banks on average have 12.5 times the CDS sold by the average insurer.

- Insurers utilise substantially less short-term funding than banks. Short-term funding as a percentage of total banks assets is 6.5 times higher than short-term funding as a percentage of insurer assets. Maturity transformation (borrowing short to lend long) is central to the business model of many banks and is a principle source of their systemic risk.

- Insurers are much less interconnected to other financial services providers than banks. Banks carry 219 times more gross derivative exposure than the insurer average with even the lowest ranked banks carrying 66 times more gross derivative exposure than the average insurer. On average, at the measurement date, banks owed on average 68 times more than insurers in gross negative derivatives and banks are also owed 70 times more from derivatives counterparties through derivatives exposure. If issues develop in derivative markets it is more likely to have an impact on banks than insurers.

Releasing the analysis in London this week, the Geneva Association’s secretary general, John Fitzpatrick said he hoped the research will prove useful to regulators and supervisors when they are considering the designation of systemically important insurers. “What is clear is that insurers’ involvement in these systemically risky activities is significantly lower than that of the 28 G-SIBs,” he said in a statement. “Furthermore, insurers generally match assets with long dated liabilities and are thus less exposed than banks to the systemic risk caused by borrowing short to lend long.”

Daniel Haefeli, head of the insurance and finance programme at the Geneva Association, warned that the designation process for global systemically important insurers needs to reflect the facts as described in the report and the specific characteristics of the insurance industry and its business model. “If the designation process is not well targeted and not appropriate, the resulting policy measures could reduce the amount of insurance coverage available in the market place,” he said in a statement. “Reducing insurance coverage available could negatively affect global growth potential at a time when the world can least afford it.”

But it will be interesting to see how insurance leaders react when the insurer list is actually published. Banks were against the initiative when it was first announced – but in the last year they have adapted their stance. Now, some banks even use their ‘too big to fail’ designation as a marketing point apparently. There is even a developing condition known as G-SIFI envy. When no Chinese bank appeared in the first G-SIB cut, the Chinese regulator lobbied successfully for the Bank of China to be put on the list.

A lot will depend on the designation process for insurers and whether the IAIS heeds the GA’s findings. But it seems likely that a G-SII list is going to have big unintended consequences for insurance industry players not on the list – as well those on it.


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