The IAIS has developed a framework of policy measures for G-SIIs based upon the general framework published by the FSB (with some adjustments to reflect the distinct features of the insurance sector). In this framework, additional measures G-SIIs must undertake include:
- Enhanced Supervision: These include the development of a systemic risk management plan and an enhanced liquidity plan. The group-wide supervisor is required to have direct powers over holding companies to ensure that a direct approach to consolidated and group-wide supervision can be applied.
- Effective Resolution: This requires the development of crisis management groups, the elaboration of resolution and recovery plans, the conduct of resolvability assessments, and the adoption of institution-specific cross-border cooperation agreements.
- Higher Loss Absorption (HLA) Capacity: In 2015, G-SIIs will be subject to basic capital requirements (BCRs) which will serve as the foundation for HLA requirements for G-SIIs. Where possible, the HLA may be targeted at the entities where the systemically important activities are located.
To help guide the development of the BCRs, the IAIS has developed three substantive principles:
- that major risk categories should be considered;
- that there is comparability of outcomes across jurisdictions; and
- that the BCR has resilience to stresses.
The impact that G-SII designation will have on the policy decisions in the home jurisdictions of the G-SIIs is of particular concern for many insurers. In the US, the Federal Stability Oversight Council (FSOC) has already identified three systemically risky non-bank companies and – at the time of writing the report – two more were under review.
In Europe, the European Systemic Risk Board is working with EIOPA to develop ongoing data reporting for systemic risk purposes as the first reporting under Solvency II begins.
The broader issue for the IAIS and the industry is how many of these proposals for G-SIIs will eventually apply to all large groups and possibly to all insurers. In this regard, this year’s EIR report offers a number of observations concerning the developments of the BCR thus far:
- The IAIS has not specified the policyholder protection levels that the BCR would represent.
- The intended application of the BCR to G-SII needs to be revisited.
- The BCR seems too simplistic a measure to apply to G-SII’s.
- It is not clear to what extent the BCR is being developed for reinsurers.
- The issue of market reaction to this new BCR remains unknown.