Tired of seeing the state bailing out banks deemed too big to fail, both the G20 and the Financial Stability Board (FSB) have made it clear that they intend to apply capital surcharges to all Significantly Important Financial Institutions (SIFIs)1.
In addition, both the G20 and the FSB plan to force SIFIs to have Recovery and Resolution Plans (RRPs) ready to implement in the event of a failure2.
Major insurers are no exception.
Of course, banks and insurance firms are significantly different businesses with considerably different operating models.
For example, insurers aren't direct participants of the payments and settlement system, don't depend on short-term market funding and aren't subject to 'run-on-the-bank' type risks – to name only several of the many differences.
In short, when it comes to RRPs, what may work for banks won't work well for insurers. We believe it's both ineffective and disproportionate to impose a banking-style RRP framework on insurers.
Building a more appropriate policy framework
Instead, supervisors should develop a fresher approach for insurers – specifically, one that links an insurer's RRP to a detailed, 'continuum-based' review of its approach to risk.
Download the report, available to the right, to see what this continuum looks like.
This continuum would, in turn, allow supervisors to revive the use of the Own Risk and Solvency Assessments (ORSA) approach in a way that takes into account the lessons learned from the Global Financial Crisis.
Making more of ICP 16
Many of the requirements set out in the International Association of Insurance Supervisors (IAIS) Insurance Core Principle (ICP) 16 largely reflect the structure of requirements as prepared for the ORSA by the Solvency Sub-Committee, prior to the crisis. This also largely applies in the case of the Solvency 2 ORSA framework.
Given the lessons learned, we believe the IAIS should augment ICP 16 to provide a policy framework for FSB consideration – a policy framework that could provide a pragmatic and proportionate link between notions of RRPs and improved risk management for all insurers. Download the report, available to the right, for more details.
For example, by expanding the ORSA requirements, the conceptual framework of RRPs could be practically applied as part of the ORSA analysis that all insurers would be expected to provide.
Specifically, a distinction can be drawn between policy options to take forward aspects related to recovery (which would provide a direct link with the ORSA) and issues pertaining to actual resolution (which should be considered separately by supervisors.)
In detail, supervisors could expect insurers to incorporate within their ORSA a range of new indicators, including:
- the potential impact of the insurer's failure on the economy
- the insurer's risk appetite and strategy
- a greater focus on non-core insurance activities and off-balance sheet items
- mandatory use of reverse stress testing
- an analysis of the concentration of business written
- the establishment of a better ladder of intervention
- enhanced corporate governance requirements
- the formalization of a chief risk officer role
- consideration of the insurer's corporate culture and of its approach to ethics.
(PDF 397 KB)2 http://www.financialstabilityboard.org/publications/r_111017.pdf
(PDF 121 KB)