Fitch: GSII Capital Rules Deter Insurers from Greater Complexity
The requirement for higher loss absorbency (HLA), published on 5 October by the International Association of Insurance Supervisors (IAIS), means there is a larger absolute increase from the Mid to the High bucket than from the Low to Mid bucket. The HLA factors increase by 50% between each bucket. This is in contrast to the additive approach adopted for the five buckets for global systemically important banks (G-SIBs). But both the top insurance and banking buckets are unpopulated on the current list of G-SIIs and G-SIBs, and are likely to remain so.
While the IAIS has provided some clarity with the publication of HLA requirements, implications for the G-SIIs and the broader global insurance industry remain quite uncertain. The relationship between the proposed capital standards and local regulatory standards is a key uncertainty. Further, the goal of achieving globally consistent capital standards is complicated by the lack of global consistency in the valuation of insurance assets and liabilities.
European GSIIs Prudential Plc and AXA, along with MetLife, Prudential Financial, and possibly AIG in the US, are likely to be in the Mid bucket. They could end up with a greater increase in capital requirements than most other G-SIIs because they have larger volumes of non-traditional insurance business, such as variable annuities. Aviva, Generali and Allianz are likely to be in the Low bucket. The Chinese G-SII, Ping An, also has banking and investment operations, so its bucket allocation will depend on the final definitions of non-insurance activities in the methodology framework.
Whether in the Mid or Low bucket, insurers are likely to target capitalisation in line with peers. All else being equal, higher capital resources driven either by higher capital requirements or peer pressure could be positive for ratings. But most G-SIIs are already well capitalised and we believe they can meet the new rules without raising additional capital.
The G-SIIs, on average, hold capital at 260% of the new requirement. Under the consultation document released in June, the IAIS expected the HLA requirements to increase capital requirements above the basic capital requirement (BCR) by an amount that did not exceed 20% on average. The new rules have a lower impact, with a maximum uplift of 20% only for the most systemic insurers in the High bucket. The average uplift to the BCR for HLA is 10%. The requirement level does not significantly exceed that of a bank in the lowest G-SIB bucket, reflecting lower complexity and connectivity risks for insurers relative to banks.
The IAIS is due to develop the revised G-SII Assessment Methodology in November, to be applied from 2016. This will improve clarity on the bucketing as it should enable annual publication of the bucket allocations for all G-SIIs. There may also be changes to the G-SII list once the methodology is finalised.