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07

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

Open-access content Tuesday 23rd July 2013 — updated 5.13pm, Wednesday 29th April 2020

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.
Click here to view this issue
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