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Global regulators finalize new capital rules for big insurers

Posted On: Oct. 5, 2015 12:00 AM CST

Global regulators finalize new capital rules for big insurers

(Reuters) — The world's nine biggest insurance companies will have to hold more capital under new rules finalized by global regulators that aim to prevent taxpayer bailouts of the industry in a crisis.

Regulators decided to look at the multi-trillion dollar insurance industry following the massive public rescue of insurer American International Group Inc. in the United States during the 2007-2009 financial crisis after a foray into risky credit default swaps.

At the request of the Group of 20 economies, the International Association of Insurance Supervisors has designed a two-part capital requirement for the nine companies, whose collapse could wreak havoc in global markets.

They include AIG, Prudential Financial Inc. and MetLife Inc. from the United States, Allianz S.E. from Germany, Britain's Aviva P.L.C. and Prudential, Ping An Insurance Co. of China Ltd., Italy's Assicurazioni Generali S.p.A., and Axa S.A. of France.

The insurers will not have to make public their extra capital buffer until 2019. As with new banking capital rules, investors are however likely to want to know if a company is strong enough to comply early without having to raise fresh capital.

Some U.S. insurance supervisors have questioned the need for global capital rules at all, saying national rules are adequate and insurers don't pose risks in the same way as banks.

The IAIS said the first capital cushion, known as the basic capital requirement, will effectively be what each of the nine insurers are already required to hold under national law.

A consultation had initially proposed that the basic capital requirement, to be phased in over three years from 2016, should be at least 75% of the national requirement.

The second capital buffer, known as higher loss absorbency, will be on average 10% of the basic requirement, depending on the riskiness of a company's operations, the IAIS said in a statement.

This has been scaled back from an original proposal for an HLA buffer, composed mainly of equity capital and retained earnings, that was on average 12-13% of the basic one.

The IAIS said total capital held by the nine insurers in the past two years averaged 260% of what they need to meet BCR and HLA requirements.

Although indicating a healthy surplus, it also puts pressure on insurers to maintain a fat buffer of capital above their minimum requirements.

In the European Union, insurers must meet new EU capital rules known as Solvency II from January but it will be up to Brussels to decide if these requirements are “equivalent” to just the BCR, or the BCR and HLA combined.

All nine must formally meet their combined capital requirements from 2019 under finalized rules which G20 leaders are due to formally endorse next month at a summit in Turkey.

The G20's regulatory task force, the Financial Stability Board, is due next month to update its list of insurance companies deemed to be systemically important.

It is not expected to say until 2016 whether big reinsurers like Munich Re should also be included, an omission that has raised eyebrows of some regulators.