US blocking new list of global too-big-to-fail insurers

US regulators are blocking efforts to update a global list of too-big-to-fail insurers, leaving the designated firms in regulatory limbo and raising questions about the current entity-based approach to managing systemic risk in the industry.

US representatives on the Financial Stability Board are refusing to endorse a 2017 revision of the list of global systemically important insurers, due for publication in November, according to two sources with knowledge of proceedings.

The impasse leaves it unclear whether the 2016 list will stay in effect, or whether the designation process will be effectively suspended – which would mean G-Siis would no longer be subject to additional regulatory and capital requirements that come with the designation.

The US is pressing the FSB to suspend G-Sii designations until after the International Association of Insurance Supervisors completes work on a new, activities-based approach to systemic risk, the sources say. The activities-based approach is not scheduled for adoption until 2019.

“The International Association of Insurance Supervisors and the FSB have realised designation is probably not the right way to go,” says a senior executive at a European firm in the sector. The FSB publishes annual updates of the G-Sii list in consultation with the IAIS and using an IAIS methodology last updated in 2016.

It’s hard to reconcile how a firm can be de-designated by its primary jurisdiction through a legally binding process, but remain systemic internationally through a largely behind-closed-doors process

Julie Mix McPeak, US National Association of Insurance Commissioners

Many in the industry have criticised the entity-based approach for penalising the largest firms simply because of their size. G-Siis are subject to enhanced group-wide supervision, including requirements for systemic risk management, liquidity management, and recovery and resolution plans. From 2022, firms designated in 2020 will also have to hold extra capital in the form of the higher loss absorbency measure; the IAIS has said this will represent, in aggregate, a 10% capital surcharge compared with international capital rules for non-G-Siis due to be adopted after 2019.

US roll-back

The domestic US equivalent of the G-Sii designation is also under siege. AIG’s status as a US systemically important financial institution (Sifi) was removed last month, while MetLife successfully appealed its designation in 2016.

Some see those decisions as a barrier to the reach of global insurance regulation in the US.

“The G-Sii process is non-binding,” says Julie Mix McPeak, Tennessee insurance commissioner and president-elect at the US National Association of Insurance Commissioners. “It’s hard to reconcile how a firm can be de-designated by its primary jurisdiction through a legally binding process, but remain systemic internationally through a largely behind-closed-doors process.”

Following an order by President Donald Trump, the Treasury is reviewing the US Sifi designation process by the Financial Stability Oversight Council, with a report on the findings due this month. Some in the industry believe the report will call for a shift away from the existing entity-based approach in the US.  

“An activities-based approach is the conclusion we’re expecting,” says a Washington lobbyist. “In some ways the FSOC review is jumping the gun on the global conversation.”

A spokesman for the FSB declined to comment, while the IAIS could not be reached for comment.  

Following an October 6 meeting of the FSB Plenary in Berlin, the body announced members had discussed the progress of annual reviews of G-Siis and systemically important banks but provided no further details.

The 2016 list of G-Siis comprises Aegon, Allianz, AIG, Aviva, Axa, MetLife, Ping An, Prudential Financial and Prudential plc.

Additional reporting by Callum Tanner

A follow-up feature will consider the international implications of AIG’s de-designation for the future of global insurance regulation.