NEW YORK • Global insurers with the greatest ties to the financial system would face an average increase of 10 per cent to capital requirements under new standards proposed by a group of regulators.
The increase would be as high as 18.75 per cent for unregulated banking activities by firms deemed to be in a riskier tier, according to documents released yesterday in Switzerland by the International Association of Insurance Supervisors (IAIS). For traditional insurance products sold by safer companies, the figure would be 6 per cent.
Global regulators are seeking to limit risk at the biggest financial firms to avoid a repeat of the government bailouts that were required in the credit crisis. While more rescue funds went to banks, the United States had to prop up insurers led by American International Group (AIG), which was hobbled by losses on derivative bets on sub- prime mortgages.
"The potential for systemic risk in insurance may become relevant where insurers significantly deviate from the traditional insurance business model," the association said in a fact sheet.
The rules are designed to "reduce the probability and impact of distress or failure" at a major firm.
Allianz, MetLife, AIG, Germany's Allianz SE and Paris-based AXA were among nine insurers designated by international regulators in 2013 as "too big to fail". The overseers said then that implementation details for capital rules would be developed by the end of this year and apply from early 2019.
Under so-called higher-loss-absorbency rules outlined yesterday, the capital standard would be at least 12 per cent higher than this year's basic capital requirements for non-traditional insurance. Such coverage could include policies tied to mortgages and variable annuities, which are retirement products where results can fluctuate with gyrations in financial markets.
MetLife, the largest US life insurer and another of the nine companies, has been scaling back variable annuity sales in recent years. The firm has been highlighting lines such as dental coverage or disability policies, where the insurer can reset prices to adjust to higher-than- expected claims costs, and where there is less risk tied to bond yields.
Still, chief executive officer Steve Kandarian has said excessive regulation could lead to higher prices for consumers and put his company at a competitive disadvantage.
He has sought to overturn a US designation that his company is a non-bank systemically important financial institution.
He has also said international supervisors should not move too fast and that rules meant for banks would not fit his industry.
"While the timing for producing a domestic capital standard remains uncertain, we believe global standards should not be finalised before a domestic standard is developed," he said in a July 30 conference call. "Upon completion, both standards should be tailored for the insurance business model."
MetLife did not get a US Treasury Department bailout in the credit crisis.
Meanwhile, AIG spokesman Jon Diat said: "AIG believes in strong regulatory oversight. AIG works closely with various regulators and believes such oversight strengthens the safety and security of the financial system and people's confidence in it."
The IAIS said supervisors will be notified confidentially, starting next year, about loss-absorbency figures, and that standards will be reviewed annually.
Insurers' requirements will not necessarily match 10 per cent as companies have "different risk profiles and business models, so there is variation", it said.
The IAIS is an organisation of supervisors and regulators in almost 140 countries. Established in 1994, it is a member of the Financial Stability Board.
The other insurers named to the global list in 2013 were Prudential and Aviva of Britain, as well as Prudential Financial.
BLOOMBERG
