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Supervision of insurers: Revisiting the 2008 pledge

Source: Asia Insurance Review | Nov 2016

Eight years have passed since the global financial crisis. After the crisis, a number of reforms were proposed and adopted not only in the banking sector but also other financial sectors, including insurance. Mr Shinya Kobayashi from the International Association of Insurance Supervisors (IAIS) explores how the supervision of insurers can be further enhanced, revisiting the commitment made after the crisis. 
  • What was pledged after the crisis was to supervise financial markets, products, and institutions in a manner that is commensurate with their respective risk profiles, not to designate global systemically important financial institutions; 
  • In light of the pledge, there are three possible areas where the supervision of insurers can be further enhanced: group-wide supervision, resolution reforms, and in-depth monitoring; and 
  • It is also important to review the post-crisis regulatory reforms and approaches.
In November 2008, just after the bankruptcy of Lehman Brothers, G20 Leaders agreed to work together in order to restore confidence in the global financial system and to achieve sustainable economic growth. 
The pledge and reforms thereafter 
On regulation and supervision of financial institutions, they pledged to strengthen regulatory regimes and prudential oversight, based on the recognition that policy makers and supervisors had not adequately addressed the risks building up in financial markets until the crisis. 
   The Leaders also decided to review the scope of financial regulation with special emphasis on “unregulated” institutions, instruments, and markets and also to define the scope of systemically important financial institutions (SIFIs).
   In November 2010, the G20 recommended to (i) determine an initial list of Global Systemically Important Institutions (G-SIFIs) by mid-2011 and (ii) put in place a policy framework comprising, for example, recovery and resolution planning, higher loss absorbency, and intensive supervisory oversight. 
   Following these recommendations, an initial list of Global Systemically Important Banks (G-SIBs) and that of Global Systemically Important Insurers (G-SIIs) was published for the first time in November 2011 and July 2013, respectively. The respective lists have been updated annually. Also, the recommended policy framework has been developed.
Discussion in the insurance sector 
In relation to defining the scope of SIFIs in the insurance sector, the International Association of Insurance Supervisors (IAIS) issued two papers in 2010 and 2011, respectively, in which the Association expressed its view that: traditional insurance is unlikely to become a source of systemic risk, but insurance groups and conglomerates that engage in non-traditional or non-insurance activities are more vulnerable to financial market developments and importantly more likely to amplify, or contribute to, systemic risk.
   This view was incorporated into the Initial G-SII Assessment Methodology published in July 2013, in which 45% of weights were given to the “Non-traditional and Non-insurance (NTNI)” category (see Figure 1). 
Figure 1: Initial Methodology and Updated Methodology
   The view seems to have been retained in the Updated Assessment Methodology published by the IAIS in June 2016; around 44% of weights (ie sum of the weights for yellow-highlighted indicators in Figure 1) are assigned to the indicators that used to be in the former NTNI category. In addition, it is worthwhile noting that the debate on how insurers can contribute to systemic risk has continued (see, for example, IMF (2016)).
How to enhance the supervision of insurers
The commitment made after the crisis was simple and clear: to supervise financial markets, products, and institutions in a manner that is commensurate with their respective risk profiles, thereby restoring confidence in the financial system and achieving sustainable growth of the economy. Designation itself is not the objective.
   In light of the commitment, it is worthwhile for policy makers and insurance supervisors to (i) review the post-crisis regulatory reforms, including regulatory approaches, and (ii) re-consider how to further enhance the regulation and supervision of insurers and insurance markets.
   One of the approaches that have been taken since the initial designation of G-SIIs is to designate a certain number of insurers in accordance with the methodology and apply more intensive regulatory requirements to those designated firms (“designate and apply” approach). 
   Although it is not the objective of this article to discuss this, it would be meaningful to assess, for example, what has been achieved by taking the approach. (Some arguments relevant to that can be found in Kobayashi (2016a) and some other arguments in Kobayashi (2016b).)
   “Supervising financial markets, products, and institutions in a manner that is commensurate with their respective risk profiles” is relevant not only to major countries, such as home countries of G-SIIs, but also to many other countries. Policy makers and supervisors therefore need to (re-)consider how regulatory and supervisory regimes can be further enhanced.
Group-wide supervision
One area for further consideration is group-wide supervision. In particular, supervision of holding companies (not only a holding company of an insurer but also a holding or parent company of the insurance holding company) and non-regulated entities still remains a challenge in many countries (IAIS; 2013). 
   There would be a variety of approaches to the supervision of holding companies and non-regulated entities. The insurance supervisor may have the power to supervise those entities in some countries; the supervisor in other financial sectors, such as banking, may have the power over the holding company of and non-regulated subsidiaries within the financial conglomerate in other countries. In any case, it needs to be considered how all material entities within the group can be subject to supervision in a manner proportionate to their risk profile.
Resolution reforms 
Resolution is another area for improvement. It is perceived that implementation of resolution reforms is significantly less advanced in the insurance sector, compared to those in the banking sector (FSB; 2016). 
   Insurers tend to be resolved in an orderly fashion through court-based insolvency proceedings and thus special resolution tools, such as statutory bail-in, may not need to be required for all insurers. Nonetheless, it is important to have in place regimes/mechanisms under which insurers are resolved in an orderly manner and policyholders can be protected appropriately. Such regimes/mechanisms include establishing policyholder protection schemes and legislating schemes through which losses are allocated to equity holders and creditors, including policyholders, respecting the hierarchy of creditors. 
In-depth monitoring 
Day-to-day supervisory monitoring would also benefit from further enhancements. Insurers can be interconnected through transactions with other financial institutions whose failure could lead to instability of the financial system. 
   In such a case, failure of an insurer could have an adverse impact on the system. It would therefore be important for supervisors to be able to monitor insurers’ exposures to and transactions with other financial institutions both on domestic and on global bases.
   There might be other areas for consideration and priorities in the areas for further enhancements might vary from country to country. At all events, continued efforts are required for better regulation and supervision of insurers. 
FSB (2016) ‘Implementation and Effects of the G20 Financial Regulatory Reforms’.
IAIS (2013) ‘Report from Expert Review Teams Conducting the Self-Assessment and Peer Review of ICPs 1, 2, and 23’.
IMF (2016) ‘Global Financial Stability Report: Potential Policies for a Successful Normalization’, April 2016.
Kobayashi, S. (2016a) ‘Global Systemically Important Insurers: Recent regulatory developments and challenges’, Vol. 67, No. 3, pp. 30 – 35, Financial Affairs, Kinzai Institute for Financial Affairs, Inc.
Kobayashi, S. (2016b) ‘Insurance and financial stability: Implications of the Tsunami View for the regulation and supervision of insurers’, Journal of Financial Regulation and Compliance (in press).
Mr Shinya Kobayashi is a Member of the Secretariat of the International Association of Insurance Supervisors. Any opinions expressed in this article are the author’s personal ones and thus should not be regarded as the official opinion of the organisations to which the author belong.
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