Global insurance regulators pause on tougher capital requirement

JUN 26, 20158:39 PM

[FRANKFURT] Global insurance regulators will take more time than previously planned to address industry concerns before applying tougher capital rules to some of the largest companies they oversee.

Capital rules for global insurers, known as the Insurance Capital Standard, or ICS, will be pushed back by about a year as regulators sift through a mass of feedback from the latest round of consultation with the industry.

"I think it's a great relief on behalf of the industry because they always said this is probably over-ambitious," Felix Hufeld, chairman of the executive committee of the International Association of Insurance Supervisors, said in a June 25 interview. "Our commitment to get this right is as strong as ever."

The Basel, Switzerland-based organization leads the insurance part of global regulators' efforts to prevent another financial crisis. The 2008 meltdown cost insurers and reinsurers globally about US$231 billion in writedowns and credit losses, according to data compiled by Bloomberg.

In the US, the government spent US$85 billion to prevent American International Group Inc from collapse over losses on financial products it insured.

IAIS resolved in 2013 to create a global Insurance Capital Standard for internationally active insurers, which it originally planned to release in 2016. Both the first and second version of the capital rules, which apply to about 45 companies, will be pushed back by about a year to 2017 and 2019, Mr Hufeld said.

In addition to ICS, the regulatory group is working on capital standards for global systemically relevant insurance companies known as Higher Loss Absorbency, or HLA. The standard would require the largest insurers to hold additional capital to cover systemic risk. A public consultation on "several options to further support and inform the design, development and calibration of the HLA" closes on Aug. 21.

"After the change to the ICS schedule, the question is what happens to the HLA schedule," Christian Thimann, head of strategy and public affairs at Axa SA, France's biggest insurer, said on June 25.

"The conceptual framework on insurance and systemic risk is not mature," Mr Thimann said. "More empirical research is needed to understand whether and how insurance business might contribute to systemic risk."

Axa is one of nine insurance companies to which the additional HLA requirement would apply.

HLA is necessary because standard insurance capital rules do not account for systemic risk of the largest companies, Hufeld said. HLA will focus on insurers' activities rather than merely taking into consideration the size of their balance sheets.

"The main focus is on what we call non-traditional non- insurance business, because we regulators believe that sort of traditional insurance business per se does not create systemic risk," Mr Hufeld said. "It can aggravate systemic risk, but it does not create systemic risk."

Mr Hufeld took over as head of Germany's financial regulator BaFin in March from former president Elke Koenig, who left to become chairwoman of the euro area's Single Resolution Board. Prior to that Mr Hufeld oversaw insurance supervision at BaFin.

BLOOMBERG