INIA Letter to Nicolas Sarkozy re: G20 Summit in Cannes, France
President of the Republic of France
Palais de l'Elysée
55, rue du faubourg Saint-Honoré
75008 Paris
Dear Mr. President:
Ahead of the G20 Summit in Cannes, France on November 3-4, 2011 the undersigned insurance associations, as members of the International Network of Insurance Associations (INIA) and representing almost 80% of the world's insurance business, would like to share our perspectives with you on the important regulatory changes being considered for our industry.
The INIA gathers together the views of national and regional life and health and property and casualty insurance and reinsurance associations from the world's major economies. The INIA therefore provides a platform to address legislative, regulatory and other issues impacting the global insurance industry.
We commend the ongoing efforts of the G20, the Financial Stability Board (FSB) and the International Association of Insurance Supervisors (IAIS) - in its role as the insurance industry's international standard setter - to advance the implementation of the G20 recommendations. INIA member associations are unwavering in their support for the G20 aims of addressing any lapses in global financial regulation and strengthening the coordination of regulation and supervision between jurisdictions.
The insurance industry serves a number of important economic functions. Insurers are providers of capital and long-term funding to the global economy through investments in large-scale projects (e.g., environmental, infrastructure, agriculture, and oil and gas). Insurers contribute to a country's economic growth and development. The sector also promotes financial security by indemnifying various risks faced by individuals and businesses such as sickness, loss of life, liability, property damage, etc.
We would first like to express our concern over the ongoing perception that insurance activities may contribute to systemic risks. We note the recent statement by the IAIS that, unlike in banking, the traditional insurance business does not pose a systemic risk - a view that the global insurance industry has held since the fallout of the 2008 financial crisis. Implicit in this outlook is the recognition that important distinctions exist between the banking and insurance business models. Insurers use rigorous risk management strategies and direct premiums into secure investments that appropriately match the expected amount of benefits paid and the duration of the policies. Banks, by comparison, are far more prone to asset-liability mismatches, which can lead to a liquidity squeeze.
In relation to this systemic risk debate, we are encouraged by the IAIS and FSB's recent decision to de-link the process for developing criteria and a methodology for identifying globally systemically important financial institutions (G-SIFIs) in insurance from banking. From the insurance industry's perspective and as the IAIS has indicated, a G-SIFI designation in insurance should only prove necessary for firms that are notably engaged in un-regulated and/or non-traditional activities. We hope this new timeline will provide for a careful consideration of what, if any, systemic risks exist among groups that include insurers. It is our hope that the timeline will significantly reduce the risk of arriving at a flawed methodology for insurers or one based inappropriately on a banking business model. As this process moves forward, we would like to encourage the IAIS to be transparent and to maintain an open dialogue with the industry.
The global insurance industry agrees with the intent behind the FSB's consultative document on Effective Resolution of Systemically Important Financial Institutions (SIFIs) to guard against systemic disruptions and avoid the need for bailouts using taxpayer funds in the event of a failing SIFI. This being said, the case has yet to be made for necessitating the introduction of special recovery and resolution plans (RRPs) for insurers. Most jurisdictions already have orderly winding-up procedures for insurers in place. Regulations require insurers to hold substantial amounts of capital in excess of technical provisions, which can assist regulators in detecting any financial strains at the firm at an early stage. The different timeframe over which the insolvency of an insurer is played out as compared to a bank means that ordinary insolvency procedures are adequate without requiring the introduction of RRPs.
In the event that the case is made to subject insurers to RRPs, we would urge the FSB to be more explicit in how it sees resolution frameworks being applied to the insurance sector as compared to banking. The FSB document cited above was overwhelmingly concerned with resolution frameworks for banks. In recognizing that not all the attributes of a resolution framework apply equally to all financial services sectors and all circumstances, the document was silent on how they should be adapted to suit the unique characteristics of the insurance business model.
We also have concerns about the inclusion of bail-in instruments as part of a resolution framework on the grounds that there is no precedent and therefore no clear understanding of how investors will react and how these instruments will function at the point of statutory conversion. The unknowns surrounding these instruments may limit investor appetite in these products and make it difficult for them to price the risk.
We would like to impress upon the IAIS and FSB that regulations which are overly prescriptive or that conflict with one another, may create opportunities for regulatory arbitrage between jurisdictions and are no substitute for effective supervision. In our view, effective supervision should ensure that supervisors have the means to obtain a clear understanding of the business model and activities of the insurer as well as a clear picture of its financial health so that, when necessary, they can challenge management. The OECD, in its Policy Framework for Effective and Efficient Financial Regulation, offers some sound recommendations in this regard.
As the G20 and international standard setters make progress towards enhancing international financial regulations, policy and decision makers need to keep in mind the unique characteristics of the insurance business, both in terms of the business model and its economic role. It is also our hope that as these regulatory initiatives are developed and refined, supervisors are as open and transparent as possible and provide ample opportunity for stakeholder involvement.
We hope that you will give these views your due consideration and that they are received in the constructive spirit in which they are offered. We would like to wish you and your colleagues every success at this G20 Summit.
Sincerely,
List of Associations:
American Council of Life Insurers (ACLI)
American Insurance Association (AIA)
Association of British Insurers (ABI)
Association of Bermuda Insurers and Reinsurers (ABIR)
Association of Savings and Investment of South Africa (ASISA)
Brazilian Insurance Confederation (CNseg)
Canadian Life and Health Insurance Association (CLHIA)
Dublin International Insurance & Management Association (DIMA)
Dutch Association of Insurers (VVN)
European Insurance and Reinsurance Federation (CEA)
Fédération française des sociétés d'assurances (FFSA) | General Insurance Association of Korea (GIAK)
German Insurance Association (GDV)
Group of North American Insurance Enterprises (GNAIE)
Insurance Bureau of Canada (IBC)
Insurance Council of Australia (ICA)
Irish Insurance Federation (IIF)
Inter-American Federation of Insurance Companies (FIDES)
International Underwriting Association of London Ltd. (IUA)
Korea Life Insurance Association (KLIA)
Property Casualty Insurers Association of America (PCI)
Reinsurance Association of America (RAA)
South African Insurance Association (SAIA) |
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