FSB Releases Guidance on Approach to Resolution of Insolvent Systemically Important Companies
October 21, 2014 by Jeff Jeffrey
WASHINGTON – Insurance companies with highly complex business models that become insolvent may not be able to rely on traditional resolution mechanisms to avoid suffering a catastrophic collapse that affects the global financial system, according to new guidance released by the G-20’s Financial Stability Board.
In an update to its guidance on the Key Attributes of Effective Resolution Regimes for Financial Institutions, the FSB said most insurance companies that become insolvent are able to be resolved through run-off and portfolio transfer procedures. But those options may not be available for companies with business models that go beyond the traditional business of insurance, making them more complex.
The guidance said companies that have been designated as globally systemically important insurers are especially likely to have more complex business models. But G-SIIs are not the only large international firms that could pose problems if they become insolvent, according to the guidance.
The FSB, chaired by Mark Carney, Bank of England governor, recommended regulators should ensure their oversight regimes should meet minimum standards laid out in the Key Attributes document. Specifically, the FSB said regulators should set clear standards to ensure financial stability and protect policyholders, beneficiaries and claimants. The resolution authority should coordinate with appropriate policyholder protection schemes, the FSB said.Resolution authorities should also have the ability to create a temporary bridge institution to take over and continue operating critical functions and viable operations of a failed firm.
Susan Stead, an attorney with Nelson Brown Hamilton & Krekstein, who represents insurance companies, said the latest guidance from the FSB includes recommendations that are already in place in most U.S. states. However, it does raise questions about how the Key Attributes standards would be implemented across national borders.
“If something really happened, the cross-border question is one that remains to be seen, particularly for companies that aren’t necessarily insolvent but are financially troubled,” Stead said. “We’ve had that in the United States for a while, where a domicile state works with another state where the company does business. But doing that cross-border with other countries may be much different.”
Among the other recommendations included in the FSB’s guidance are for regulators to have the power to restructure, limit or write down insurance, reinsurance and other liabilities. They should be able to allocate losses to creditors and policyholders.
The FSB said regulators should also be able to transfer insurance contracts and reinsurance, in addition to having the power to temporarily restrict or suspend policyholders’ rights to withdraw from insurance contracts.
“This is all very similar to the efforts to set common standards that apply to international insurance companies that we’ve seen at the International Association of Insurance Supervisors and other places,” Stead said.
At the direction of the FSB, the IAIS is working to have higher loss absorbency requirements for G-SIIs completed by the end of 2015. By 2016, the IAIS expects to start applying basic capital standards to G-SIIs.
Currently, there are nine companies set to be designated as G-SIIs. The list includes U.S. insurers American International Group Inc.; Metropolitan Life Insurance Co. Inc.; Prudential Financial Inc.; and the U.K.-based Prudential plc. The Financial Stability Board has also given G-SII designations to Allianz SE; Assicurazioni Generali S.p.A.; Aviva plc; Axa S.A.; and Ping An Insurance Company of China Ltd.
Once the standards are set for G-SIIs, the IAIS intends to have risk-based, group-wide global insurance capital standards for internationally active insurance groups by 2019.
The proposed capital standards are expected to be a major issue during the IAIS’s annual conference, which is being held in Amsterdam this week (Best’s News Service, Oct. 16, 2014).
Many U.S.-based industry trade organizations are sending teams to the IAIS conference in an effort to help shape the standards before they are implemented.
