Economist: Systemic Insurers
Globally Systemic Insurers: Premium Members
Regulations devised for banks are being recycled for large insurers.
LARGE and often sleepy, insurers have long claimed to be the financial world’s shock absorbers, there to contain the carnage periodically unleashed by their banking brethren. Regulators have left them on the fringes of sweeping post-crisis reforms that have reshaped much of the financial sector. Until now. On July 18th nine global insurers (see chart) were branded “systemically important” by the Financial Stability Board (FSB), a global watchdog. They now face the prospect of closer regulatory scrutiny and tougher capital standards.
Insurers do not much like this new approach. They insist they are nothing like banks, subject to periodic runs from fickle customers and liquidity crises when capital markets dry up. When insurers falter, they quietly run down their books with little collateral damage. In contrast, the mere risk of a bank failure has to be mitigated lest it cause financial Armageddon.
In truth, regulators are more worried by non-insurance activities carried out by insurance groups than by their core activities. That makes sense: the only big insurer to blow up in the crisis was American International Group (AIG), which got a $182 billion bail-out in 2008 because a berserk subsidiary built up huge exposures to American subprime mortgages.
But it is not clear which activities the FSB considers core and which it thinks are too racy for insurers. Regulators (and others) worry about some annuities, savings-like products which offer guaranteed returns to customers. Many insurers also have big investment-management arms that help them accumulate the assets they need to match against their liabilities, but which also invest money for outsiders. Allianz, a German firm on the FSB’s list, owns PIMCO, a bond-trading giant with $2 trillion of assets under management. “The line between traditional and non-traditional activities is blurry,” says Rob Jones of Standard & Poor’s, a ratings agency.
That blurriness explains why the FSB’s measures also target the underlying insurance businesses of the systemic firms. It wants backstop capital ratios to apply to all group activities, not just the non-traditional bits. That would dent profits and potentially put the largest insurers at a competitive disadvantage to smaller rivals. For an industry where diversification—and therefore lower risk—comes partly through size, this seems odd. Even more perversely, insurers under the new regime may use the “systemic” tag to imply a state guarantee.
Insurers say the immediate impact on them will be less disruptive than locally devised regulations such as Solvency 2, a clunky and repeatedly delayed set of European rules. For now, those on the list are meant to design “living wills” that would be used to wind them up should the need arise. Capital charges will not come into effect until 2019. Some will probably conclude that spinning off non-traditional assets before then would be better than facing an additional regulatory burden. That would make them less like the banks they bristle at being compared to.