Greater transparency in the G-SII assessment process

Greater transparency in the G-SII assessment process

On 16 June 2016, the International Association of Insurance Supervisors (IAIS) issued its final papers on the G-SII assessment methodology and its paper on systemic risk from insurance product features to coincide with its global conference.

Director and Insurance regulatory lead, EMEA

KPMG in the UK


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Further to our March update, on 16 June the IAIS issued its final papers on the G-SII assessment methodology and its paper on systemic risk from insurance product features (in the process dropping the much disliked non-traditional non-insurance (NTNI) title) to coincide with its global conference. It notes that the higher loss absorbency (HLA) requirements that are imposed on global systemically important insurers (G-SIIs) will be amended to take account of these papers.

The papers show that the IAIS has taken on board much of the feedback to the two consultations. Insurers will be pleased to see the loss of the NTNI acronym and the continuance of a focus on activities that the original consultation proposed. However, the most notable point for the industry is the greater transparency that will be provided within the G-SII assessment process in future. These two aspects are covered below.

G-SII assessment methodology

The consultation paper’s proposed five phase assessment process remains, including the use of absolute reference values for the derivatives trading, financial guarantees and reinsurance indicators. Some repositioning of weightings within the quantitative assessment has occurred, to align with the changes to NTNI made in the systemic risk from insurance product features (see below). However, the most significant change is the clarification of how transparency will work.

At this stage, transparency will only be applied in relation to those insurance groups within the assessment pool, although public disclosure may be considered in the future. The level of disclosure depends on how far the group are taken through the process:

  • For insurance groups that do not proceed beyond phase III of the assessment process, information will only be available on request and not before the FSB publishes its annual G-SII list. The information available is the insurer’s overall score together with quantitative threshold used to determine which groups pass onto phase IV of the assessment process. They can also receive their score on each of the Phase II indicators, together with the median score and the distribution of scores across the population of assessed firms.
  • Groups that enter phase IV of the assessment process will receive the above information prior to the phase IV discussion process, together with detailed information and data from phases I to III of the assessment process and the outcome of the phase III analysis. After the IAIS has made its recommendations to the FSB at phase V, it will also share its conclusions drawn from phase IV.

Once the FSB has issued its G-SII list, the IAIS will also report publicly information in aggregate on the indicators together with the data template used and instructions issued and a description of the nature of the analysis undertaken in phase III. It will also release an analysis of aggregate trends identified, including whether any areas of systemic importance warrant additional monitoring.

Systemic risk from insurance product features

The focus remains on features within insurance contracts that could have systemic risk implications. The features considered in the consultation paper remain: the implications of macroeconomic exposure (and the potential for domino effects) and substantial liquidity risks (with the potential to cause policyholder runs or fire sales of assets). There has been no change to the list of product features, but the explanations have been enhanced. Account has also been taken of the general concerns expressed on the consultation paper that there was insufficient consideration of risk management techniques to reduce gross exposures. For example, consideration is now included regarding asset/liability matching.

This paper also explains how this the developments in this paper have been taken into account in the G-SII assessment methodology referred to above. In particular, the NTNI section has been removed, with sub-sections reanalysed where appropriate, replaced by a new asset liquidation section. The paper also confirms that this paper supersedes references to NTNI within the IAIS G-SII Policy Measures document from 2013.

Implications for insurers

Insurers will welcome the change in terminology from NTNI to systemic risk from insurance product features, especially since they have long argued that the majority of insurance contracts do not lead to systemic risks. More importantly though, the increased transparency of the G-SII assessment process will provide much greater insight into a group’s relative position on the perceived risk scale. This will not only facilitate a better discussion with the IAIS, but will also enable them to better consider where they should consider de-risking, which was one of the original objectives of the G-SII measures in the first place.

Regulatory challenges

KPMG’s Financial Services Regulatory Centers of Excellence can provide insights into the implications of the raft of regulatory change.

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