Friday, November 8, 2013

Insurance: Regulations likely to bring back more focus on ‘Risk Management’ practices and global visibility

At recent G20 Summits, the G20 Leaders endorsed the implementation of an integrated set of policy measures to address the risks to the global financial system from systemically important financial institutions (G-SIFIs). Accordingly FSB (Financial Stability Board), in conjunction with IAIS (International Association of Insurance Supervisors) identified an initial list of Global Systemically Important Insurers (G-SIIs) consisting of 9 groups:
1) Allianz, 2) AIG, 3) Generali, 4) Aviva, 5) Axa, 6) MetLife, 7) Ping An, 8) Prudential Financial and 9) Prudential plc.

Basically, FSB is trying to solve 'Too big to fail' problem by hand picking large global institutes and subjecting them to a set of policy measures.

Although the initial focus is on these designated global SIFIs, it may eventually come down to all large, internationally active carriers. Many domestic regulators are likely to designate domestically important insurers and apply policy measures on the similar lines. In June 2013, U.S Department of Treasury FSOC designated AIG and Prudential Financial as SIFIs, and both will be subject to stricter regulatory standards and supervisory oversight under the 2010 Dodd-Frank Act.

The set of policy measures comprise:
• recovery and resolution planning requirements;
• enhanced group-wide supervision; and
• higher loss absorbency requirements ( including non-traditional non-insurance (NTNI) subsidiaries)

The impact of these regulations is still being worked out, however, at the minimum, it requires following from IT perspective -
• Integration of data sources for recovery/resolution and risk management across the group
• Identification of changes to Risk management metrics and bringing in visibility at group and legal entity level
• Identification of intra-group exposures
• Approach for ring fencing NTNIs and development of risk management plan & systems

In July 2014, Systematically important Reinsurers will be identified and they are likely to have similar impact. I will update this entry as we do more research on this.

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