NU Online News Service, June 12, 12:00 p.m.EDT

Moody's Rating Service gives a favorable review to new rulesproposed by the International Association of Insurance Supervisorsto identify insurers that would pose a systemic risk to the globalfinancial system, but the “devil is in the details,” notes anindustry representative.

In an analysis, Laura Bazer, vice president-senior creditofficer for Moody's, says that the methodology proposed by the IAISto identify global systemically important insurers (G-SIFIs) wouldbe viewed favorably due to greater global regulatory coordinationthat “levels the regulatory playing field and prevents regulatoryarbitrage, in which businesses move from highly regulatedjurisdictions to loosely regulate ones.”

On May 31, the IAIS released its criteria for identifying insurers that pose aglobal systemic risk, and determining what those carriers will berequired to do in order to ward-off future financialcalamities.

Moody's says the IAIS vision of rules would be general “policymeasures” focusing on reducing the insurer's risk of creatingfinancial disruption.

The IAIS' recommendations include:

• Increase in risk-based capital requirements.
• Separate legal structures for traditional and non-traditionalactivities.
• Greater global coordination of supervision of a carrier byregulators.

In an interview, Bazer says the thrust of the regulations is toset-up measures to identify companies at higher risk, and then totake measures to avert a situation where the failure of an insurerwith a global reach could impact other financial markets, producinga domino effect of disruption to the world markets.

The rules have a lot of commonality with proposals by regulatorsin the United States to determine the systemic risk of an insurer,and would help coordinate regulations across jurisdictions, helpingweaker jurisdictions benefit from the influence of stronger ones,says Bazer.

The IAIS proposal would begin with the collection of datasometime in the first half of 2013 and would require more extensivesupervisory requirements by 2017 at the earliest.

But J. Stephen Zielezienski, general counsel for the AmericanInsurance Association, says that while there are some good aspectsto the IAIS' proposal, what really matters are the details thatdefine what a systemic risk is.

Citing the U.S. Financial Stability Oversight Council'sdesignation of what defines a systemically important financialinstitution (SIFI), Zielezienski says the domestic version hasdesignated benchmarks that can inform a company of when it hasreached financial markers indicating the company is likely to beconsidered a systemic risk.

“This is a start, but there still needs to be a lot of work,”says Zielezienski. “We have to get to a place where, at least as ascreening mechanism, there are some quantitative metrics thatcompanies can actually run and measure themselves from thethreshold; then compare themselves with other sectors.

“While the focus is correct, the devil is in the details,” saysZielezienski.

Whatever comes out of the discussions, both internationally anddomestically, Zielezienski says there should be no traditionalinsurers that make it into the systemic-risk program, but how thatstacks-up against what IAIS ultimately decides to incorporate “isstill a bit premature.”

In an e-mail, Steve Broadie, vice president, financial policyfor the Property Casualty Insurers Association of America said,“PCI agrees with the IAIS conclusion that there is no 'evidence oftraditional insurance either generating or amplifying system riskwithin the financial system or in the real economy.'

“While some important details of the IAIS methodology needclarification, we agree with Moody's that few insurers are likelyto be placed on the G-SII list. PCI thinks it is particularlyunlikely that companies primarily engaged in writing traditionalproperty casualty business will be designated.”

This story was updated June 12 at 5:03 p.m. EDT withcomments from Broadie.