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07

Impact of G-SII status on credit ratings mixed, says S&P

Open-access content 23rd July 2013

There are mixed implications for the insurance firms that have been designated global systemically important insurers (G-SIIs), according to credit rating agency Standard & Poor’s.

An S&P report, published yesterday, assessed the ratings implication of G-SII status and highlighted both positive and negative ramifications for the firms.

Nine insurers have been designated G-SIIs by the Group of 20's Financial Stability Board. These are: Allianz; American International Group; Assicurazioni Generali; Aviva; Axa; MetLife; Ping An Insurance (Group) of China; Prudential Financial; and Prudential.

'We see the requirements for G-SIIs to hold more capital and to enhance the quality of their capital instruments as positive for the ratings, all other things being equal,' said Rob Jones, S&P's credit analyst.

'However, at the same time, we believe these changes could lead to a higher cost of capital, which we generally see a ratings negative.

'In addition, G-SIIs will face heightened regulatory oversight, and this could also have either positive or negative repercussions - positive in terms of the potential avoidance or early detection of risk, and negative in terms of strategic constraint and regulatory burden.'

G-SII status may encourage a firm to restructure, ring-fencing or divesting itself of systemically risky activities, S&P noted. The status might also enhance an insurer's competitive position in the eyes of customers and investors. Government behaviour towards G-SIIs, however, was unlikely to change.

S&P said G-SII designation was not likely to alter the way it differentiated between insurers and banks deemed to be of global systemic importance.

'Our approach reflects that, whereas G-SIBs [banks] benefit from direct extraordinary government support from their domestic markets, G-SIIs do not,' said the agency.

'We do not anticipate that governments would provide capital or liquidity to insurers since their business models do not generally involve on-demand liabilities that are akin to bank deposits. Furthermore, insurers can generally be run-off (or "resolved" in banking parlance) in an orderly fashion, whereas banks generally cannot.'

This article appeared in our July 2013 issue of The Actuary.
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