Federal Reserve Gov. Daniel K. Tarullo appeared to urge careful consideration by international regulators on their future actions in designating insurers as non-bank systemically important financial institutions (SIFIs) in remarks Feb. 22 in New York.
"It is important to take the time to evaluate carefully the actual systemic risk associated with these (insurance) companies, and to understand the amount of such risk relative to other financial firms, before fixing on a list of firms and surcharges," Tarullo stated.
It is unclear if Tarullo was targeting his remarks to the International Association of Insurance Supervisors (IAIS) or the Financial Stability Board (FSB), which makes the final determination on these designations, but the remarks were embraced by insurance interests.
The sentiment seems sympathetic with the take of big insurers, a representative of which has said they have been sitting in a number of meetings where there's the various representatives of the FSB and the IAIS considering the methodology to name global firms as systemically important, and the insurance industry reps would argue that insurers are different, and policymakers would be dismissive.
"Ultimately, the evidence should drive policy-making and I think that is what you see reflected in Daniel Tarullo's speech and remarks," said John H. Fitzpatrick, secretary general of the Geneva Association, in a short interview Monday.
The Basel-based Geneva Association membership comprises a statutory maximum of 90 chief executive officers from the world's top insurance and reinsurance companies. The U.S. company CEOs involved in this report include those from Prudential, MetLife, New York Life, Liberty Mutual, AIG, RGA and The Hartford, as well as, in Bermuda: Ace, Arch, Axis, Renaissance and XL.
The IAIS should remove traditional insurance activities in determining its methodology for identifying globally systemically important insurers (G-SIIs or G-SIFIs) that may be misclassified, insurers have argued in comments submitted to the IAIS.
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Traditional insurance features too prominently in the IAIS indicators, creating a situation that could result in non-risky insurers being designated as systemically risky and systemically risky insurers avoiding designation, the Geneva Association has warned.
The Federal Reserve has been more stringent in grouping insurers subject to its regulation and oversight with banks under Dodd-Frank, but Tarullo was commenting in his New York remarks not so much on domestic policy as international.
Tarullo added that "this seems to me a realistic goal over the next six months." The first of the G-SIFIs, or, more accurately, Global Systemically Important Insurers (G-SIIs). Global SIIs are expected to be named in April, according to the previously stated IAIS timetable.
Tarullo was discussing work on designating non-bank SIFIs [internationally], and noting that, to date, it has "been pursued mostly in the IAIS and thus has concentrated on insurance companies."
Tarullo, very active on Dodd-Frank Act detail work at the Fed, was speaking at the Cornell International Law Journal Symposium on "International Cooperation in Financial Regulation."
U.S.-based insurers are alarmed with many of the elements that would be applied to any insurance company designated as a G-SII.
The IAIS financial stability committee had met on Jan. 14 in New Orleans to host a discussion on policy measures that would be applied to G-SIIs, although not much will be known on how the comments are received until the first, if any, G-SIIs are named. This move is expected in April, with annual designations thereafter expected each November, according to the IAIS timeline. Not all the policy measures will be implemented at once. Some measures won't kick in until 2019.
However, Tarullo's remarks lent credence to the argument by insurers that they are different from banks. The bank regulatory-heavy FSB will ultimately decide on G-SIIs, and most insurers believe that insurers are not by and large systemically risky, especially when compared to the largest banks.
To that end, the global insurance industry think tank and insurer advocate Geneva Association conducted a benchmark study called the Cross-Industry Analysis—28 G-SIBs vs. 28 Insurers, Comparison of systemic risk indicators, which was recently updated to compare the landscape between insurers and three banks removed from the special designation list in November.
In most of the compared indicators, the three removed banks are still significantly larger than the largest insurers selected for the original study, the updated research showed.
The original study compares the named 28 Global Systemically Important Banks (G-SIBs) and 28 of the world's largest insurers on indicators of systemic risk.
The benchmark study takes 17 indicators required by the IAIS data calls that are comparable between insurers and banks to provide an analysis of the size of each activity.
