IAIS approach to resolution powers and planning must reflect insurers' business model - per GFIA

The Global Federation of Insurance Associations (GFIA) has said that it is essential for the International Association of Insurance Supervisors (IAIS) to recognise the differences between the banking and insurance business models and to therefore apply an approach that is proportionate to the relatively very low risk posed by insurers to financial stability.

GFIA made this comment in its response to a consultation being conducted by the IAIS on resolution powers and planning. Feedback is to be submitted by 26 March 2021.

The insurers' umbrella association said, “When considering resolution powers and planning, it should also be recognised that the nature of insurance failures allows portfolios to be transferred and run-off over a long period of time, in contrast with bank failures. Therefore, a very different set of tools and level of intervention is usually required.”

Some highlights from the GFIA's response include:

Proportionality

The association supports the application of proportionality. The proportionality principle should ensure that firms are not required to devote significant resources to developing resolution plans when the value of doing so is rather limited and could actually be counter-productive where it acts as a distraction from more effective preventive measures.

If a large number of insurers are required to draft a resolution plan, the industry upholds that proportionate simplifications (eg less content and lower reporting frequency) of the resolution plan are appropriate.

Operational resolution plans

The industry believes that the operational resolution plans need to be tailored to the circumstances of the insurer and with sufficient flexibility to allow the authorities to consider the circumstances of resolution. At the same time, over-reliance on resolution plans may divert attention from assessing the causes of a potential crisis and adequate measures to cope with them. If a resolution plan is required, the industry agrees that the proportionality principle should be applied as it is being developed and updated.

Resolution powers

The industry believes that run-offs and portfolio transfers are sufficient to deal with the large majority of insurance failures. Therefore, these should be the preferred tools and authorities should clearly justify the need for more intrusive tools and why run-off or portfolio transfers are not sufficient to meet the objectives of resolution. The industry would also like to re-emphasise that, since failures take longer in insurance than, for instance, in banking, rapid intervention is not a good reason for the choice of resolution tools, especially as fire sales of assets or the crystallisation of their value could result in unnecessary value destruction.

Taking control

The industry is concerned that reasonable and efficient measures, like the centralisation of processes and systems or intra-group transactions, may not be allowed or may even have to be reversed. Such interventions could have far-reaching consequences in areas such as corporate and tax law, but also in terms of investor relations and ratings. Indeed, the concerned insurers could suffer competitive disadvantages in the long-term. Likewise, their policyholders could incur additional costs or loss of returns.

Interventions in a solvent company by an authority should remain an exception and only take place when absolutely necessary. Such tools would have to be used very carefully and in a transparent way. The resolution authority should closely coordinate with the concerned insurer and first give the insurer the opportunity to propose its own solution for removing the impediment to resolvability.

Coordination

Resolution authorities, supervisors and crisis management groups should coordinate and cooperate with guarantee associations in order to develop sound resolution strategies provided that the necessary confidentiality concerns are effectively addressed.

GFIA, established in October 2012, represents through its 41 member associations and 1 observer association the interests of insurers and reinsurers in 64 countries. These companies account for 89% of total insurance premiums worldwide, amounting to more than $4tn. GFIA is incorporated in Switzerland and its secretariat is based in Brussels.

Source: Asia insurance review