Insurers Ask G-20 To Differentiate The Industry From Banks

NU Online News Service, Oct. 25, 3:05 p.m. EDT

Property and casualty and life and health insurance companies worldwide are asking the Group of Twenty to differentiate their industries from banks in crafting measures designed to address systemic risk.

Trade groups representing both domestic and foreign insurers and reinsurers asked for the different treatment in a letter sent in advance of the G-20 meeting scheduled for Nov. 11 and 12 in Seoul, South Korea.

The meeting of finance ministers and central bank governors will address ways the largest nations can join in drafting regulations designed to strengthen and better coordinate regulation of the global financial system.

The letter, sent to the U.S. Treasury, contends that insurance companies have a different risk profile than banks, and subjecting them to additional capital and reporting requirements in order to prevent systemic risk could well "have the opposite effect by increasing the risk of moral hazard and causing market distortions."

Moreover, the letter said, "the identification of individual insurers as being systemically important financial institutions (SIFIs) and subjecting them to additional capital and reporting requirements would miss the ultimate goal of achieving greater financial stability."

The letter said that insurers fared "relatively well" in the financial crisis in comparison to other financial services sectors.

"This is evidence that the insurance regulatory framework, which is aimed at an adequate level of policyholder protection, works well in most jurisdictions," the letter explained.

Moreover, a risk-based and principles-based approach to regulation and supervision allows regulators to choose from a range of measures other than simply resorting to higher capital requirements, the letter continued.

Signatories to the letter include the Property Casualty Insurers Association of America; the Reinsurance Association of America; the American Insurance Association; the American Council of Life Insurers; the Association of British Insurers; the Association of Bermuda Insurers and Reinsurers; the Brazilian Insurance Confederation; the Canadian Life and Health Insurance Association; the Dutch Association of Insurers; the European Insurance and Reinsurance Federation; the General Insurance Association of Japan; the Insurance Bureau of Canada; the Insurance Council of Australia; and the Life Insurance Association of Japan.

Besides capital requirements, the letter suggested other systems where insurers differentiate themselves from banks.

For example, the letter asks that proposals to strengthen resolution frameworks should not be applied to the financial sector as a whole without giving due consideration to the insurance business model and the orderly wind-up procedures that already exist in insurance regulation.

The letter also says it is unnecessary to levy fees aimed at paying for a future resolution of a troubled insurer. No such advance levy is necessary, the letter states, because it is less likely that insurers compared to banks will be the recipients of any future government interventions.

This concern is aimed at international proposals for a financial transaction or financial activity tax that would be used to recover the costs of the direct and indirect public intervention in the banking sector due to past or future financial crises.