AIA Statement on FSB Designation of Global Insurers as ‘Systemically Important’

WASHINGTON, July 19 -- The American Insurance Association issued the following news release:

Leigh Ann Pusey, president and CEO of the American Insurance Association (AIA), issued a statement in response to the Financial Stability Board's (FSB) announcement designating an initial list of "global-systemically important insurers" or G-SIIs. In coordination with the FSB, the International Association of Insurance Supervisors (IAIS) published its G-SII assessment methodology and a set of policy measures that would apply to those designated companies.

The FSB was established to coordinate the work of national financial authorities and international standard setting bodies at the international level and promote the implementation of effective regulatory, supervisory and other financial sector policies. Ms. Pusey's statement follows:

"AIA has repeatedly stated its view that the insurance business model and the regulated insurance activities that flow from that model do not pose a systemic threat. To the contrary, the insurance business model possesses features that add stability to the financial markets. Property-casualty insurer operations are funded by upfront premiums, which reduces the need to access the credit markets. Because the risks that a property-casualty insurer assumes are typically not correlated, an insurer is not prone to a customer 'run' on the company's assets and consequently, can better control its outflows. This low leverage environment of property-casualty insurers is a key element of stability.

"While the IAIS acknowledges the low potential for systemic risk from regulated insurance activities, we remain concerned with the designations and the methodology that produced the designations for a few reasons. First, since the global methodology was directed solely at insurers, the criteria compared insurers to one another, rather than all other types of financial institutions. As a result, we are not confident that the process yielded results based on objective 'systemic risk' criteria. This has also led to artificial distinctions in the methodology between 'traditional' and 'nontraditional' types of insurance activities that may not be based on systemic risk and may unfairly stigmatize those types of insurance that are deemed nontraditional. Second, AIA remains concerned that such a 'ranking' of insurers overemphasizes size, despite the IAIS methodology limiting size to 5% of the designation determination. Third, for those designated as G-SIIs, the IAIS plans to now develop backstop group capital requirements that will be applied on a global basis. If companies are incorrectly designated as G-SIIs, application of heightened capital standards could end up either harming their ability to compete or could unintentionally lead to the type of systemic threat that the FSB and IAIS are trying to avoid.

"The reliance on additional capital as a regulatory first step - rather than a measure of last resort - should be subject to thoughtful and serious debate about (1) the role of capital in the insurance business, (2) respect for local jurisdictional standards, and (3) the preservation of private market competition across the globe. As the IAIS goes on to develop a 'quantitative capital standard' as directed by the FSB, AIA will continue to work with the IAIS and national and international regulatory regimes to resolve this critical debate in a way that protects insurance consumers, leads to efficient and effective supervision, and advances competition."

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