The IAIS held their latest stakeholder meetings on 19 and 20 January 2016. These covered the latest thinking on insurance resolution and the consultation papers on G-SII (Global Systemically Important Insurers) Assessment Methodology and Non-Traditional Non-Insurance.
This area has been identified as a key focus area for 2016 and the working party’s initial thinking was presented. The IAIS considers that recovery and resolution (R&R) measures should be applied to all insurers regardless of their size or systemic importance, but on a proportionate basis. As the Solvency II experience has shown, the proportionality concept is difficult to apply consistently and there was significant audience concern regarding how effective supervision would be and whether the potential cost will be proportionate to the potential benefit.
Currently, R&R measures are only applied to the small number of global systemically important insurers (G-SIIs). Audience concern revolved around the argument that unless insurers give rise to systemic risk, application of G-SII requirements would not be appropriate.
Although the debate around domestic systemically important insurers (D-SII) has not really progressed, there was a feeling that any measures proposed should be applied only to address the potential systemic risk posed. For non/less systemic insurers, there were strong arguments made that the focus of supervision should be on policyholder protection. This should take account of the long duration of insurance business, the tools already available to both insurers and their supervisors (such as portfolio transfers and run-off) and the role that compensation/guarantee schemes can play in protecting policyholders against insurer default.
The IAIS plans to issue a consultation paper in this area in mid-2016 and it will be interesting to see how its thoughts develop in the light of the strong reactions from the audience.
The consultation paper’s proposed five phase assessment process was explained. However, although this is an improvement on the current approach, there was concern from the audience that the qualitative overlays introduced at phase 3 cannot impact on the G-SII score determined based on quantitative measures at phase 2 (unless correction is needed as a result of identified data errors).
The use of absolute reference values was welcomed, but there was a general feeling that there should be more of these where possible, as well as calls for cross-sectoral comparisons against the G-SIB assessment methodology, with a general feeling that insurers remain significantly less systemic than their banking counterparts.
The increased transparency was welcomed, although most of the audience felt that this should be transparency to the firms included within the assessment process, rather than public disclosure.
The proposed methodology will be applied to the assessment process from 2016.
The focus of the NTNI consultation paper is on insurance products, considering what features within insurance products could have systemic risk implications. This is the first step of a three-step process to clarify the NTNI concept. The three steps are:
There was a general consensus from the audience that non-traditional has been too widely defined, with too much emphasis on gross, rather than net, exposures and insufficient consideration of the timing of cash outflows. For example, the asset/liability matching principle can reduce net exposures to non-systemic levels and insurers may have different payment profiles for surrender payments depending on the volume of surrenders received. There was also concern that the paper did not incorporate any probability analysis (for example, mass lapse events rarely occur).
The general feeling in the audience was that while the IAIS had clearly developed its thinking significantly, more was needed to ensure that the systemic risk is not overstated.The IAIS aims to finalize all three steps of the NTNI process in time to be incorporated included within the 2016 G-SII designation exercise.