The International Association of Insurance Supervisors (IAIS) is participating in a global initiative along with other standard setters under the auspices of the Financial Stability Board (FSB) and the G20 group of finance ministers and central bank governors.
The FSB has reviewed the assessment methodology and policy measures for G-SIIs, developed by the IAIS. The FSB and national authorities, in consultation with the IAIS, will designate an initial list of G-SIIs this month, although the G-SII status of major reinsurers, and appropriate risk-mitigating measures for them, will be determined in July 2014.
The policy measures that will apply to G-SIIs include the recovery and resolution planning requirements under the FSB's key attributes: enhanced group-wide supervision and higher loss absorbency requirements. As a foundation, the IAIS will develop straightforward backstop capital requirements to apply to all group activities, finalised by the time of the G20 Summit in summer 2014. Over time, regulators may wish to extend such requirements to insurance groups that they consider to be domestically significant.
The FSB's Key Attributes of Effective Resolution Regimes for Financial Institutions would be the basis for improved resolvability and would help reduce the effect of a G-SII failing.
For G-SIIs, effective resolution will take account of the specificities of insurance, including:
? plans required to separate non-traditional, non-insurance (NTNI) activities from traditional insurance activities;
? possible use of portfolio transfers and run-off arrangements as part of the resolution of entities conducting traditional insurance activities; and
? the existence of policyholder protection and guarantee schemes in many jurisdictions.
What are the implications for insurers?
Insurers will probably be expected to:
? develop a map of critical functions that would be essential in the event of the insurer experiencing a systemic event;
? assess their ability to maintain and fund operations of critical functions and to conserve or restore the firm's own funds;
? examine the sufficiency of funding arrangements and ensure adequate access to contingency funding sources;
? have relevant data on group structure, intra-group exposures and exposures to counterparties, other intra-group inter-dependencies and service-level agreements;
? reduce risk and leverage if necessary - for example, the extent of engaging in stock lending to invest proceeds in higher-yielding paper;
? explore the need to restructure liabilities, business lines and asset transformation;
? maintain access and continued functioning of IT services and other infrastructure;
? determine trigger and stress scenarios; and
? ensure adequate, robust risk management systems, capable of measuring the impact that severe stresses may have on the firm's business model.
It will be interesting how the PRA develops its own approach to this over the coming months and how it then applies it to the domestically significant UK insurers.
? Nick Dexter is a partner at KPMG and Rob Curtis is a director at KPMG. Both are members of the Life Practice Executive Committee's Recovery and Resolutions Plan Working Party