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S&P questions value of systemic designation for international insurers


The merits of the global systemically important insurer designation — G-SII — assigned to nine international insurers by the Financial Stability Board are not clear, according to an analysis released Tuesday by Standard & Poor’s Corp. in London.

In fact, S&P said in “Insurers May Not Pose a Systemic Risk, So Do the G-SII Designation’s Costs Outweigh Its Benefits?” that the designation’s merits may not outweigh its costs for both insurers and regulators.

The Basel, Switzerland-based FSB named nine insurers — Allianz S.E., American International Group Inc., Assicurazioni Generali S.p.A., Aviva P.L.C., Axa S.A., MetLife Inc., Ping An Insurance (Group) Co. of China Ltd., Prudential Financial Inc. and Prudential P.L.C. — as G-SIIs last July.

The board is expected to designate additional insurers as G-SIIs in November. G-SIIs would be subject to heightened regulatory oversight and more stringent capital requirement

“We recognize that large insurers are systemically important because of the role they play in the financial system,” said S&P in the report. “However, we question whether their potential failure poses a systemic risk in the same way that most large banks’ would. As such, the question becomes whether naming certain insurers as G-SIIs enhances financial stability and warrants the resulting costs to insurers and their regulators.”

S&P said it believes that the G-SIIs generally aren’t too big to be allowed to fail because it’s possible to resolve their liabilities post-failure without disrupting the financial system and without the injection of taxpayers’ money.

“Capital injections generally aren’t necessary when resolving insurers because, relative to banks, they have low financial leverage, lower liquidity risk, low interdependency, and extensive use of subsidiaries (rather than branches). The infrequency of insurer bailouts historically bears this out,” S&P said.

S&P added it thinks that systemic risk was more evident in insurance at a national, rather than global, level during the financial crisis, when U.S. bond and mortgage insurance and trade credit insurance in some European markets posed systemic concerns.

“We further believe that the creation of G-SIIs could divert regulatory resources toward these entities while more risk accumulates at the non-G-SIIs,” said S&P.