ABIR Comments: IAIS GSII Assessment Methodology
FINAL ABIR COMMENTS
IAIS GSII Assessment Methodology
The Association of Bermuda Insurers and Reinsurers (ABIR) represents the public policy interests of Bermuda’s international insurers and reinsurers that protect consumers around the world. With headquarters and operations in Bermuda and with operating subsidiaries in the United States and Europe, these carriers do business in more than 150 countries.
We appreciate the opportunity to provide comments on the IAIS Proposed Updated Assessment Methodology for Global Systemically Important Insurers (the Paper) and acknowledge the IAIS commitment to evaluate the ways and extent to which the assessment methodology should be reviewed and revised.
Determinants of which companies should qualify as a GSII is a complex issue and not an easy one to resolve and whilst the current consultation paper seeks to make certain revisions the selection criteria predominantly remain a factor of size and global activity. ABIR would like to comment specifically on the IAIS proposal to include the reinsurance indicator and the reinsurance supplemental assessment.
Question 6: Are total global reinsurance premiums written an appropriate absolute reference value for the reinsurance indicator? If so, how should this absolute reference value be used by the IAIS? What other information or data could be used as an absolute reference value for the reinsurance indicator?
It is difficult to understand why reinsurance is a factor for consideration of systemic risk when the IAIS itself has studied and researched reinsurance in detail and concluded that ‘traditional reinsurance is unlikely to cause, or amplify, systemic risk.’ Additionally, there have been numerous other well respected academic and technical papers produced that are consistent with the conclusion the IAIS reached.
The reinsurance indicator and the reinsurance supplemental assessment implies that reinsurance is an activity that contributes to systemic risk. Reinsurance is used as a risk mitigation tool and as such would require a cautious approach to applying ‘systemic riskiness’ to reinsurance if any. We appreciate that the analysis may provide information on interconnectedness but that information must be carefully understood and weighted given that it has already been concluded that reinsurance is unlikely to cause or amplify systemic risk. ABIR would recommend that the reinsurance indicator be eliminated or significantly reduced.
In addition, if the IAIS is looking at interconnectedness, reinsurance premium alone may be an insufficient reference point given the growth in capital markets instruments, such as side cars and cat bonds, which perform some of the risk mitigation functions as insurance.
Question 19: How can the additional information collected in the supplementary reinsurance-specific questions as part of the data collection be relevant to better assess the potential effects of a reinsurer’s failure on other reinsurers or primary insurers? Should the IAIS set a threshold amount of third-party reinsurance activities that must be exceeded by an insurer in order to be required to complete the supplementary reinsurance-specific questions in Phase 1? If so, what should be the level of the threshold?
In light of ABIR’s comments under question 6, ABIR does not comprehend the purpose of the Reinsurance Supplemental Assessment. As previously stated, the IAIS has looked at reinsurance in detail and has concluded that “traditional reinsurance is unlikely to cause, or amplify, systemic risk.” It is then unclear why there should be a need for additional analysis of an undertaking’s reinsurance activities in Phase III, particularly since there is already a reinsurance indicator in Phase II. If such an assessment is to be carried out, it only makes sense instead of rather than in addition to the Phase II reinsurance assessment.
The assessment of the potential effects of a reinsurer’s failure on other reinsurers or primary insurers should take full account of the IAIS’s own work on extreme stress scenarios, the conclusion of which was: “The results are similar for both primary insurers and reinsurers. The impact on equity capital (which in this context serves as a proxy for solvency) of severe financial market crises far outweighs the adverse effect of large catastrophic loss events. Adding the default of one large reinsurer would make a comparatively small contribution to the total losses absorbed by primary insurers.”
In addition, the IAIS report “Reinsurance and Financial Stability” dated 19 July 2012 concluded that “as far as traditional reinsurance activities are concerned, the potential for adverse and potentially systemic intra-industry impacts is small and will likely be contained within the insurance sector”.
The Reinsurance Supplemental Assessment is unlikely to provide any new insights. Furthermore, any assessment methodology should be open and transparent and applied consistently by supervisors across jurisdictions. Clarity is needed on how this will be applied in general in respect of Phase III assessments and particularly in the case of the Reinsurance Supplemental Assessment, where it is a component of Phase III.
In order to determine whether there is any systemic impact from the reinsurance activities of a failed reinsurer one needs to investigate the exposure the primary insurers have in terms of reinsurance liabilities to the failed reinsurer and determine whether there would be a critical impact on the primary insurer if those liabilities would not (or not entirely) be fulfilled.
If the IAIS does proceed with this analysis, as we mentioned in our responses to question 6, an examination of reinsurance concentration should not just be limited to reinsurance, but should look at the use of alternate capital market instrument such as cat bonds which may reduce the concentration of the company’s reinsurance by expanding the options used for risk management.