Insurance groups and CEOs are bristling against the globaldesignation of insurers as Global Systemically Important Insurers(G-SIIs) by the Financial Stability Board (FSB), an action expectedin or near the first quarter of 2013.

Insurers argue they carry much less systemic risk, even whenvery large, than any bank, and are different from banks and shouldnot be treated as banks or it could upset the global economy inways not contemplated by regulators.

Insurers are particularly concerned over the potentialintroduction of blanket capital requirements. A blanket capitalsurcharge on large global insurers would reduce the efficiency ofrisk pooling and lead to more expensive insurance, less riskcapacity and, ultimately, greater reliance on state protection,said the Institute of International FinanceInc. (IIF).

"Because the traditional insurance business is not a source ofsystemic risk, it is important that any additional policy measuresare specifically designed to focus only on those non-traditionaland non-insurance activities that pose systemic risk," said StevenA. Kandarian, vice chair of the IIF Insurance Regulatory Committeeand CEO and chairman of MetLife. "A blanket capital surcharge mayraise the cost of offering traditional insurance products andresult in reduced availability of products currently meeting socialneeds."

Proposed targeted capital increases on separated activities alsohave the potential to generate or aggravate systemic risk,according to major insurers.

The IIF encouraged the International Association of InsuranceSupervisors (IAIS) to regard separation and targeted capitalsurcharges as measures of last resort, only to be considered aftera specific assessment and identification of systemic relevantactivities, and only after taking into account risk mitigationactivities.

"Most non-traditional and non-insurance activities are closelylinked to traditional insurance and complement each other withoutbeing systemically risky. A separation may eliminate the benefitsresulting from such diversification," the IIF stated.

The Property Casualty Insurers Association of America (PCI) toldthe group of insurance supervisors that reports to the FSB onG-SIIs, that IAIS' proposals for increased regulation could harmG-SIIs and their consumers as they carry out their traditionalinsurance activities.

Additional capital at the group level as a capital add-on wouldbe harmful to traditional insurance activities, as well as thepolicyholders they serve, according to the group, which respondedto the IAIS Dec. 14.

PCI urged the IAIS to focus its proposed policy measures onsystemically-risky activities. 

AIG, and more companies than many are comfortable with,have been rounded up in data calls to examine whether they willtrigger a G-SII designation.

Concurrently, the Financial Stability Oversight Council (FSOC),chaired by Treasury Secretary Timothy Geithner, is holding offdesignating AIG as a systemically important financial institution(SIFI), perhaps into next year, according to several sources.

The IIF urged the IAIS to undertake a comprehensive study toassess the potential impact of its proposals on the wider economy,and the ability for insurers to provide their services to theeconomy, similar to that undertaken by the Basel Committee onBanking Supervision and the BIS at the time of their proposals toaddress systemic risk in the banking sector.

In a meeting last week, it was anticipated that the FSOC woulddesignate AIG as a SIFI, a domestic designation meaning it wouldcome under the supervision of the Federal Reserve Board and besubject to enhanced capital requirements, liquidity requirements,short-term debt limits and public disclosures as mandated under theDodd-Frank Act.

It is unclear if the processes for designating G-SII and SIFIsare being coordinated in terms of timing, as once suggested, and ifso, to what extent. The criteria take markedly differentapproaches—all roads lead to more or enhanced capital requirements,but both processes are thought to envelope, at least for now, AIGand perhaps Prudential Financial and MetLife.Certainly they have been engaged in the process so far. Analysts atWashington Analysis have said Prudential will likelyjoin AIG,MetLife and possibly the Hartford amonginsurance companies the FSOC is considering designating asSIFIs.

The Federal Insurance Office (FIO) is working with the IAIS onthe "criteria, methodology and timing" of SIFI designations "so noU.S. insurer is disadvantaged through global designation of[SIFIs]," FIO Director Michael McRaith told House FinancialServices subcommittee panel on Insurance, Housing and CommunityOpportunity on May 17.

The IAIS, operating under the direction of the FSB, isdeveloping a methodology for the (G-SIIs). The IAIS concluded thissummer that traditional reinsurance is unlikely to create oramplify systemic risk.

What constitutes systemically risky is still being debated,however. Some groups want non-traditional activities, which includevariable annuities, removed from the systemically risky category,and only want non-insurance activities subject to heightenedsupervision.

PCI said that the activities that pose systemic risk should bemore carefully defined, and only those activities should beincluded in the definition. 

These measures should be directed at the few non-insurance andnon-traditional insurance activities that are actually systemicallyimportant, and should aim to reduce the risk of those activities byimproving risk management, rather than induce insurance groups notto engage in those activities, PCI said.

The measures should not be applied on a uniform,one-size-fits-all basis, but rather only as needed, based upon anindividual G-SII's particular circumstances. PCI wants themeasures, as yet not fully known, to be used sparingly and that anyadditional capital requirements should be applied only to theactivities that pose systemic risk. 

"There should be a clear link between those activities and themeasures designed to reduce their risk, and that definition shouldprovide insurers the certainty needed to decide whether or not toengage in those activities," PCI said.

The Geneva Association, an international insurance think tankmade up of insurance CEOS from both life companies, reinsurers andproperty casualty companies, suggested to the IAIS a three-stepprocess for applying policy measures to insurers in an escalating"ladder of intervention." 

The Geneva approach involves identifying non-traditional,non-insurance (NTNI) activities that are systemically relevant andweighing where they can be handled without further intervention, bythe company's existing governance system and "developing andpromoting effective regulatory, supervisory and other financialsector policies to improve financial stability and addressinformation gaps is vital to ensure the smooth functioning of theglobal financial sector," said John H. Fitzpatrick, secretarygeneral of The Geneva Association. Fitzpatrick is also on the boardof AIG.

The Geneva Association's recent Cross-IndustryBenchmarking report sought to quantify and compare thesystemic risk of banks versus insurers using comparable criteriarequired by the IAIS data calls.

It found that, among other things, insurers are significantlysmaller than banks in most of the 17 indicators required by IAISdata calls.

The largest insurer would rank 22nd among globally systemicallyimportant banks (G-SIBs) , the Geneva Association researchfound.

With their significantly smaller amounts of short-term fundingshow, insurers are much less interconnected with the financialsystem than banks, the Geneva Association found.

Insurers match assets with liabilities and are thus less exposedthan banks to the systemic risk of maturity transformation(borrowing short to lend long) and carry substantially lowerpositions in derivatives, the research showed. 

This benchmarking study is the first ever comparison between the28 named G-SIBs and 28 of the largest global insurers.