MetLife: Global Insurance Assessment Regime Like ‘A Black Box’
November 16, 2015 by Frank Klimko, Washington correspondent, BestWeek: frank.klimko@ambest.com
WASHINGTON – The ongoing efforts to identify and impose enhanced supervision for globally active insurance companies is not transparent and threatens to tilt the competitive marketplace against U.S. companies, said Graham Cox, executive vice president for global risk management at MetLife Inc.
“The global assessment model is a black box,” Cox said. “There is not enough transparency to have us understand what drives the designation process. It’s not clear what we would do to no longer be a [global systemically important insurer].”
Cox spoke at a panel on Nov. 13 at the Bipartisan Policy Center’s Insurance Task Force, which discussed efforts by the International Association of Insurance Supervisors to better regulate large insurance companies and keep safe the global economy. Metlife has been designated a GSII, along with some eight other companies.
The GSII rules seem predisposed against U.S.-based insurance companies, Cox said.
The IAIS has focused on nontraditional/non-insurance insurer activities, which the group said could amplify systemic risk under specific circumstances, such as reacting to a sudden market downturn or the unexpected withdrawal of capacity (Best’s News Service, Oct. 05, 2015).
“This drives the entire process and we believe the NT/NI process to be fundamentally flawed,” Cox said. “It focuses on certain activities and not the risk of those activities. The design has a bias against U.S.-based products.”
Even without the bias, there are problems that are embedded within the notion of coming up with global standards.
“When you are working on things like global standards, there’s always a danger of applying anything to a select group,” Cox said. “We all compete in the local insurance markets and we need a level playing field. If we face local standards on top of some higher global standards, than we no longer have a level playing field.”
Cox also criticized the GSII process because it contained no absolute thresholds for riskiness, but instead depended on measuring the financial threat companies posed by comparing them to each other.
“It’s based on designating risk relative to other firms,” Cox said. “If all the firms are becoming less risky, which I think has happened, than a relative measure would (continue) to flag the same firms irrespective of the fact that they are all operating at less risk.”
The IAIS on Nov. 12 announced it had formally adopted one component of the new standard, which global insurers will have to meet, the Higher Loss Absorbency Requirement — a 10% average capital requirement surcharge for the largest companies. The quantitative standards (which are pending) will apply to large international insurers (about 50) while the Higher Loss Absorbency are reserved for the approximately nine GSIIs.
The HLA is a surcharge that will be placed on top of a calculation based on each company’s basic capital requirement. The basic capital requirement is calculated from the amount of capital each firm is already required to hold. The IAIS has determined an actual basic capital requirement dollar figure for each company it oversees, but has not released those amounts, officials told Best’s News Service.
Both will act as financial cushions in case of some economic calamity.
But, the dual standards also represent a new balance sheet requirement for big companies, Cox said.
“We are talking about big companies having to come up with a new balance sheet in a few months,” Cox said. “The notion of creating a new balance sheet is misguided.”
Operating units of MetLife have current Best’s Financial Strength Ratings of either A (Excellent) or A+ (Superior).
In afternoon trading on Nov. 13, shares of MetLife (NYSE: MET) were priced at $49.93, up 0.95% from the previous close.
