Insurance interests embraced comments by Federal Reserve Gov. Daniel K. Tarullo urging careful consideration when designating insurers as non-bank systemically important financial institutions (SIFIs), even if it was unclear at whom the remarks were aimed.
“It is important to take the time to evaluate carefully the actual systemic risk associated with these (insurance) companies, and to understand the amount of such risk relative to other financial firms, before fixing on a list of firms and surcharges,” Tarullo stated in remarks Feb. 22 in New York.
It is unclear if Tarullo was targeting his remarks to the International Association of Insurance Supervisors (IAIS) or the Financial Stability Board (FSB), which makes the final determination on these designations.
The sentiment seems sympathetic with the take of big insurers, a representative of which said policymakers have been dismissive in meetings when industry reps argue that insurers are different than banks as representatives of the FSB and the IAIS consider methodologies to name global firms as systemically important.
John H. Fitzpatrick, secretary general of the Geneva Association, welcomed Tarullo's remarks in a short interview Monday, stating, "Ultimately, the evidence should drive policy-making and I think that is what you see reflected in Daniel Tarullo's speech and remarks."
The Basel-based Geneva Association membership comprises a statutory maximum of 90 CEOs from the world’s top insurance and reinsurance companies.
The Geneva Association has warned that traditional insurance features too prominently in IAIS indicators, creating a situation that could result in non-risky insurers being designated as systemically risky and systemically risky insurers avoiding designation.
The Federal Reserve has been more stringent in grouping insurers subject to its regulation and oversight with banks under Dodd-Frank, but Tarullo was commenting in his New York remarks not so much on domestic policy as international.
Tarullo was discussing work on designating non-bank SIFIs [internationally], and noting that, to date, it has “been pursued mostly in the IAIS and thus has concentrated on insurance companies.”
Tarullo, very active on Dodd-Frank Act detail work at the Fed, was speaking at the Cornell International Law Journal Symposium on “International Cooperation in Financial Regulation.”
U.S.-based insurers are alarmed with many of the elements that would be applied to any insurance company designated as a globally systemically important insurer (G-SII).
The IAIS financial stability committee had met on Jan. 14 in New Orleans to host a discussion on policy measures that would be applied to G-SIIs, although not much will be known on how the comments are received until the first, if any, G-SIIs are named. This move is expected in April, with annual designations thereafter expected each November, according to the IAIS timeline.
However, Tarullo’s remarks lent credence to the argument by insurers that they are different from banks. The bank regulatory-heavy FSB will ultimately decide on G-SIIs, and most insurers believe that insurers are not, by and large, systemically risky, especially when compared to the largest banks.
To that end, the Geneva Association released an update to a benchmark study it previously conducted, called the Cross-Industry Analysis—28 G-SIBs vs. 28 Insurers, Comparison of systemic risk indicators.
The original study, released in December, compared the named 28 Global Systemically Important Banks (G-SIBs) and 28 of the world’s largest insurers on indicators of systemic risk. The study examined 17 indicators required by IAIS data calls that are comparable between insurers and banks to provide an analysis of the size of each activity.
The recent update compares the landscape between insurers and three banks removed from the special-designation list in November.
In most of the compared indicators, the three removed banks are still significantly larger than the largest insurers selected for the original study, the updated research showed.
Tarullo spoke about insurance in a section of his remarks dedicated to subjects that he believes should be emphasized in the near term.
Specifically, Tarullo, stated, “As to the framework for systemically important financial institutions, I would urge that two ongoing initiatives be completed over the next year and two ideas that have been in the discussion stage be developed into concrete proposals.”
The IAIS work and a capital surcharge for banking SIFIs appear under the Basel Committee to be the initiatives the Fed seems to want done in the next year, according to the remarks.
At the conclusion, Tarullo said that a “reenergized international agenda for cooperation in international financial regulation” will continue to evolve.
The IAIS had no comment--a response from Treasury/FIO was pending at presstime.