The International Association of Insurance Supervisors yesterday published a consultation document asking for views on its proposals, which it said have been “endorsed” by the Financial Stability Board. The FSB is itself coordinating an overall project to reduce the moral hazard posed by global systemically important financial institutions.
Under the proposals, insurers deemed “systemically important” (G-SIIs) would have to draw up specific plans to reduce the risk they pose to the financial system. This could also include restrictions on activities outside their normal business.
The first of three main policy measures highlighted by IAIS said: “Enhanced supervision applies immediately to all G-SIIs to ensure that they rapidly achieve the higher standards of risk management their G-SII status demands… The authorities should also analyse activities that cause systemic importance of G-SIIs and take necessary measures to reduce that systemic importance. This includes development and implementation of a Systemic Risk Reduction Plan which could include measures such as separation of non-traditional non-insurance activities from traditional insurance business and/or restriction or prohibition of systemically important NTNI activities.”
Reduce moral hazard
In a statement, Peter Braumüller, chair of the IAIS executive committee, said: “These proposed policy measures are intended to reduce moral hazard and the negative externalities stemming from the potential disorderly failure posed by a G-SII.
“Each of the proposed policy measures has also been designed to take account of the specific nature of the insurance business model and is the result of intensive and thorough discussion at the IAIS.”
Ultimately the aim of the measures is to remove the incentives for an insurer to become so systemically important to the global economy that it is not allowed to fail by introducing these punitive measures.
The consultation document, which can be accessed here, sets out clear objectives of the IAIS’s proposals namely:
- Reduce the probability and impact of distress or failure of G-SIIs and thus reduce the expected systemic impacts which disorderly failure may cause.
- Incentivise G-SIIs to become less systemically important, and give non-G-SIIs strong disincentives from becoming G-SIIs, and
- Be linked to the drivers of the G-SII status of each individual insurer.
