Systemic Risk & Insurance. 11 June 2013 Matthias Kubicek Legal Counsel

Transcription

1 Systemic Risk & Insurance 11 June 2013 Matthias Kubicek Legal Counsel

2 Agenda Evolution of Regulation & Supervision Regulatory landscape Systemic risk in insurance Timeframe & industry position Definition Methodology Consequences Discussion 2

3 Evolution of Insurance Regulation & Supervision Solvency l Factor based formula introduced 1973 (P&C) and 1979 (Life) Main shortcoming: Solvency I does not reflect risks (eg. Investment risk) Rating agencies acted as de facto regulators Capital market crisis of 2001/2002 has shown the need of a risk based supervisory system Solvency II Systemic Risk Regulation - GSII ComFrame? Risk based supervisory system Pillar I: Capital requirements, Pillar II: Management procedures, Pillar III: Disclosure 2009: adoption of the Framework Directive (its application is limited to the EU) Group Supervision strengthened through the introduction of colleges and EIOPA Higher Loss Absorbency (HLA)? Recovery & Resolution planning? Enhanced Supervision? SSRPs? Separation? Ring-fencing? IAIS Project launched in 2011, applicable to Internationally Active Insurance Groups Increased cooperation between supervisors, also through colleges Separate Capital requirements for (re-)insurers? Field testing in 2013 What s the added value for (re-)insurers? 3

4 Insurance Regulation & Supervision landscape Company Level Subsidiaries Branches Cross-border Insurance Group Regulation & Supervision National Level Local Supervisors BaFin Ausschuss für Finanzstabilität Regulation & Supervision EU Level EU Group Supervisor? EIOPA ESRB Regulation & Supervision Global Level Global Group Supervisor? IAIS FSB 4

5 Agenda Evolution of Regulation & Supervision Regulatory landscape Systemic risk in insurance Timeframe & GA position Definition Methodology Consequences Discussion 5

6 Timing - Milestones April 2009: G20 provided a macro-prudential mandate to the FSB (formerly FSF) November 2011: FSB identified 29 GSIBs (reduced to 28 in 2012) Process for insurers has successfully been delinked & delayed Insurance related activities in 2011/2012: IAIS consultations on the assessment methodology IAIS consultations on possible consequences (or policy measurers) IAIS data call (in collaboration with national supervisors) June 2013: Decision by FSB and national supervisor. Early July 2013: announcement? 6

7 The Geneva Association s work on financial stability and systemic risk regarding insurance We believe that the development and promotion of effective supervisory and regulatory policies to reduce systemic risk and address information gaps is for the benefit of all concerned, including the insurance sector. The Geneva Association has issued 5 research reports over the last 3 years to develop understanding of financial stability in insurance; Systemic Risk in Insurance (March 2010); Key Financial Stability Issues in Insurance (July 2010); Considerations for Identifying Systemically Important Financial Institutions in Insurance (April 2011); Insurance and Resolution in Light of the Systemic Risk Debate (February 2012); Surrenders in the Life Insurance Industry and their Impact on Liquidity (August 2012) ; Cross Industry Analysis (December 2012, updated February 2013)

8 Key statements - 1 The (re)insurance industry weathered the crisis well and was not the source of the financial crisis. Rather, (re)insurers played a stabilising role during the crisis. Traditional (re-)insurance activities do not create or amplify systemic risk.. The Geneva Association continues to promote an activity based approach identifying the potentially Systemically Risky Activities (psra) and then determining the policy measures best used to reduce the impact of psra should they become SRA. Two non-traditional activities could potentially contribute to systemic risk. Derivatives trading on the non-(re)insurance balance sheet. Mismanagement of short-term funding from commercial paper or securities lending.

9 Key statements - 2 Current and upcoming regulatory regimes economic- and principles-based (like Solvency II) already adequately address all (re)insurance activities. The (re)insurance supervision approach is still a role model for banking supervision. The implementation of a comprehensive, integrated and principle-based supervision framework for insurance groups, in order to capture, among other things, any non-insurance activities such as excessive derivative activities. AIG, publicly perceived as an insurer, was a financial conglomerate. Their problems mainly arose at holding company level (supervised by the Office of Thrift Supervision, a banking regulator) and in AIG Financial Products Inc. (the AIG banking arm). AIG Holding and AIGFP had become an important counterparty to systemically important banks as a seller of credit protection. The insurance subsidiary of AIG Holding was only remotely affected and did not trigger nor amplify the crisis.

10 Key Statements - 3 Throughout history the wind-up of a (re-)insurer has never caused systemic instability. Insurance companies wind-up and exit from markets have traditionally been conducted in an orderly manner as sound asset and liability management ensures continuous claims settlement; the (re-) insurance balance sheet does not react to stresses in the same way as the banking balance sheet: Ongoing reserving requirements stabilise the wind-up process. Reserves are predominantly held in local legal entities. Reserves are covered by securely invested tied assets (depending on local law). 10

11 Key statements - 4 The few (re)insurers who experienced serious difficulties were brought down by their banking activities, not their traditional (re)insurance business. These insolvencies demonstrate the demand for an integrated, holistic group supervision, but not for defining new risk categories. There is no shadow-banking in insurance. (Re-)insurers are not banks. In contrast to banks, assets of (re-)insurers are built up only after the premiums are paid. Borrowing money for investments is not part of the (re)insurance business model.

12 Key statements Insurance balance sheet absorbs losses differently to banks Insurer balance sheet (illustrative, non economic) Bank balance sheet (illustrative, non economic) Other assets Free surplus Surplus covering regulatory capital Securities (debt and equity) and Other assets Free surplus Surplus covering regulatory capital Other liabs Matching principle Issued debt Securities (fixed income, equity, money market, etc.) Technical Provisions (not callable at will) Loans Transformation principle Deposits (callable at will) Assets Liabilities Assets Liabilities Insurers balance sheets are made of technical reserves (which include expected future claims) while liabilities of banks are made of deposits (which are callable at will) Insurers balance sheets are driven by liabilities under the principle of maturity matching, while banks balance sheets reflect the maturity transformation of their business model

13 Agenda Evolution of Regulation & Supervision Regulatory landscape Systemic risk in insurance Timeframe Definition Methodology Consequences Discussion 13

14 FSB definitions: Systemic risk and GSIIs Systemic risk is a risk of disruption to financial services that is (i) caused by an impairment of all or parts of the financial system and (ii) has the potential to have serious negative consequences for the real economy Systemic event is the disruption to the flow of financial services that is caused by an impairment of all or parts of the financial system and has the potential to have serious negative consequences for the real economy. (FSB) SIFIs are those institutions whose disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity. Need to look at impact of a potential failure (whatever the cause of failure was) on others, not on probability of failure Need to differentiate between systemic disruption of entire market, but not caused by behavior of individual company (in which government bail-out might occur) and systemic crisis caused by behavior / failure of individual company Both are relevant from systemic risk perspective Only the latter can be criterion for designation of an individual company as SIFI 14

15 Agenda Evolution of Regulation & Supervision Regulatory landscape Systemic risk in insurance Timeframe Definition Methodology Consequences Discussion 15

16 G-SIIs Criteria currently discussed Proposal to measure systemic risk in insurance IAIS data collection included 48 (re-)insurers National authorities are involved, IAIS working group to develop final methodology and analysis Development of a ranking amoungst (re-)insurers To be determined: Where is the Cut-off point? (Also in relation to banks and other available data) GA cross-industry analysis IAIS Global Systemically Important Insurers: Proposed Assessment Methodology. Public Consultation Document. 16

17 Cross industry analysis 28 G-SIBs vs. 28 Insurers Comparison of systemic risk indicators December 2012 Updated February 2013

18 NTNIA Gross Notional Credit Default Swaps (CDS) Average bank is 158x the average insurer on CDS sold Gross notional CDS protection sold Insurers (US$, BN) Gross notional CDS protection sold Banks (US$, BN) All buckets Lowest ranked Sample size = 15 Sample size = 19 (all), 10 (bucket 1) NTNIA = Non Traditional Insurance Activities This indicator is the NTNIA Derivatives trading indicator Source: Individual company annual reports, bankscope data, Geneva Association estimates, Oliver Wyman analysis Insurers write substantially less CDS than banks This indicates that the impact of insurers distress on the buyers of CDS protection is far less than banks AIG 2007 reflects the activities of AIG FP before the crisis

19 NTNIA Gross Notional Credit Default Swaps (CDS) The lowest ranked banks have 12.5x the CDS sold by the average insurers Gross notional CDS protection sold (US$ BN, 2010) Insurers and Banks 2012 ex G-SIBs* The largest of the 3 ex G- SIBs is significantly larger than the largest insurer and is 30x larger than the average insurer. The second leaver is twice as large as the highest ranked insurer Sample size = 15 (insurers), 19 (banks) Source: Individual company annual reports, bankscope data, Geneva Association estimates, Oliver Wyman analysis NTNIA = Non Traditional Insurance Activities * Data for 2012 ex-g-sibs is 2011, latest available annual data prior to decision by FSB

20 Size Total assets Largest insurer would rank as 22 nd largest G-SIB Total assets (US$ BN, 2010) Insurers and Banks 2012 ex G-SIBs* Two ex G-SIBs are larger than the largest insurers. The third ranks 5 th among the insurers Sample size = 28 (insurers), 28 (banks) Source: Individual company annual reports, bankscope data, Geneva Association estimates, Oliver Wyman analysis * Data for 2012 ex-g-sibs is 2011, latest available annual data prior to decision by FSB

21 NTNIA Short term funding Insurers have significantly lower short term funding compared to banks, even the lowest ranked bank exceeds the average of the insurers Short term funding (US$ BN, 2010) Insurers Short term funding (US$ BN, 2010) Banks All buckets Lowest ranked Sample size = 26 Sample size = 28 (all), 14 (bucket 1) Short term funding is the absolute sum of short term borrowing, commercial paper issued, certificates of deposit issued, gross value of repos and gross value of securities lent Source: Individual company annual reports, bankscope data, Geneva Association estimates, Oliver Wyman analysis

22 NTNIA Short term funding Insurers are not involved in maturity transformation due to the insurance business model Short term funding (US$ BN, 2010) Insurers and Banks 2012 ex G-SIBs* All three ex G-SIBs are much more dependent on short term funding than all insurers. The smallest ex G-SIB is more than 15x larger than the average insurer Sample size = 26 (insurers), 28 (banks) Short term funding is the absolute sum of short term borrowing, commercial paper issued, certificates of deposit issued, gross value of repos and gross value of securities lent Source: Individual company annual reports, bankscope data, Geneva Association estimates, Oliver Wyman analysis * Data for 2012 ex-g-sibs is 2011, latest available annual data prior to decision by FSB

23 Despite all facts and arguments, would political and regulatory decision makers accept this headline? Monday Juli Is it realistic to assume no (re)insurance company will be designated SIFI? Want politicians to see AIG on a SIFI-list? What does it mean for other large insurance companies? 23

24 Agenda Evolution of Regulation & Supervision Regulatory landscape Systemic risk in insurance Timeframe Definition Methodology Consequences Discussion 24

25 Possible consequences of being a G-SII HLA or Capital Surcharge Recovery and Resolution Plans (living wills) Extended supervision and reporting data calls SRRPs / SRMPs Separation, ring-fencing 25

26 Recovery & Resolution Recovery already a tool for insurers according to Solvency II Resolution issues: single-point-of-entry or multiple-point-of-entry Creditor hierarchy Bail-in mechanisms Guarantee schemes 26

27 Agenda Evolution of Regulation & Supervision Regulatory landscape Systemic risk in insurance Timeframe Definition Methodology Consequences Summary / Discussion 27

28 Thank you very much for your attention 2013 Münchener Rückversicherungs-Gesellschaft 2013 Munich Reinsurance Company