In an announcement that on one hand seems like a compliment, but on the other hand a curse, financial regulators have announced the names of nine insurance companies perceived as globally, systemically important.
The Financial Stability Board, chaired by Bank of England Governor Mark Carney, and which coordinates at an international level the work carried out by international supervisors, has named Aegon, Allianz, American International Group (AIG), Aviva, Axa, MetLife, Ping An, Prudential Financial (US) and Prudential plc (UK) as systemically important financial institutions or SIFI.
In agreement with the International Association of Insurance Supervisors (IAIS), the list was unchanged from the year before and, whilst acknowledging a company’s global stature, also brings a raft of additional financial and operational requirements that must be met.
- Showing a higher capacity to absorb insurance losses
- Being subject to enhanced regulatory supervision, and
- Demonstrating group-wide recovery and resolution planning alongside other requirements.
Earlier this year, MetLife successfully challenged similar requirements being applied by the US domestic body, the Financial Stability Oversight Council or FSOC, a move which drew criticism from Treasury Secretary, Jack Lew and led to an appeal.
Too big to fail
Companies classified in this way are deemed a threat to global financial stability due to their interconnectedness across world financial markets. In 2008, at the height of the Global Financial Crisis (GFC) and as Lehmans stumbled, American International Group (AIG), famously needed to be rescued by the US Government. Since that time, insurers and banks regarded as too big to fail, have been more closely watched to ensure any risk they pose due to their global, systemic significance, is as controlled as possible.
From a commercial point of view, the closer supervision required by an SIFI company is an additional and most likely unwelcome hurdle which smaller, less exposed companies will not have to meet.
Too big to save
While the international financial community strives to ensure the GFC of 2008 is never repeated, it is clear that this will not happen without considerable resources being applied to monitoring and supervising capital strength whilst at the same time, managing risk as best as possible. Insurers deal in risk, of course, that is what they do – however, as we saw just a few years ago, risk comes in many forms and is not as quantifiable as we may wish it to be.
As a contrast to insurance companies and banks being too big to fail, what happens if they are too big to save?