Systemic insurers to delay structural reform

Systemically important insurers will stop short of committing to plans

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Systemically important insurers will stop short of committing to thorough restructuring plans until regulators fix global capital rules that will apply to risky activities, lawyers say.

This comes two months before the deadline for submission of systemic risk management plans (SRMPs), the first requirement that applies to global insurers deemed systemically important, a group of nine that includes Allianz, Generali and MetLife among others.

According to guidance published by the International Association of Insurance Supervisors, insurers must set out in their SRMPs the basis of recovery and liquidity plans. Firms have discretion on whether to unveil plans to discontinue, sell or separate non-traditional and non-insurance activities (NTNI) from the rest of the business.

But the documents are likely to be kept vague at least at an early stage, experts say, adding that SRMPs will likely be reviewed as regulators stabilise the fine details of the regulatory framework being developed for global systemically important insurers (G-Siis).

"I would be surprised if there are preordained structural changes attached to SRMPs," says a David Whear, London-based partner at Norton Rose Fulbright, a law firm. "We will see a lengthy period of to and fro between the firms and supervisors before firms arrive at a definitive plan."

The uncertainty about the capital implications for insurers carrying out NTNI activities, a concept that will apply to business units selling variable annuities, is one of the main reasons.

From 2019, G-Siis will be required to hold extra capital – higher loss absorption (HLA) capacity – against NTNI activities, but the size and the scope of this requirement will not be agreed before the end of 2015.

"The concept of HLA is not sufficiently clear for us to take decisions based on it," says an insurance executive at one of the European G-Siis. "It is not only about the formula of calculation, but also the extent to which it applies beyond NTNI."

In addition, firms may wish to delay strategic decisions until they have developed their liquidity and recovery plans and supervisors have agreed on a resolution plan. This is scheduled for the end of the year, says Victoria Sander, partner at Linklaters, a law firm, in London.

"One could argue that the timetable for the various plans is not appropriate. Firms will find it hard to complete their SRMPs in a meaningful way before they decide on what they would do in the context of recovery and how they would prepare for resolution. But this is what the current timetable requires."

The resolution plan, which is determined by supervisors in particular, can have profound consequences on the structure of the business, depending on the approach that is decided on.

Resolution can take the form of a single point of entry approach, in which the resolution powers are applied at the top of a group by a single national resolution authority. Shareholders and creditors at that level incur losses and capital flows down to keep regulated subsidiaries solvent.

Alternatively, supervisors might decide upon a multiple point of entry approach, in which resolution tools are applied to different parts of the group by the respective resolution authorities, acting in coordination. In turn, this might require firms to ring-fence specific parts of the business.

The version of SRMPs submitted in July will already incorporate supervisory input. Group-wide supervisors have been the first point of contact for insurers, but other national supervisors have also been involved in discussions, according to industry sources.

G-Siis have two years to implement the measures set out in the SRMP, however firms recognise that there will be some room for change along the way.

"These are uncharted waters," the European insurance executive says. "The development of the plan has been an iterative process and once the plan is submitted we do not expect supervisors to come back to us and say we need to change this. But, at the same time, it is clear things will evolve over time and we might have to adjust."

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