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Kathy Burger
Kathy Burger
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Implications Of The Global Systemically Important Insurers List

Insurance companies may push back against the Financial Stability Board's designation of nine companies as G-SIIs, but history shows that even prominent firms can stumble when it comes to financial and investment management.

When I started covering the insurance industry in the early 1990s, the big story was insurance company financial stability and solvency. The failures of prominent companies such as Executive Life, Monarch Life and Mutual Benefit Life due to overinvestment in junk bonds and disastrous real estate investments were making headlines and standing as cautionary tales about reckless financial management. Amid the industry disarray, soul-searching and bad press, regulators imposed requirements -- most notably the NAIC's risk-based capital rules -- with a goal of minimizing the risks of this kind of financial crisis occurring again.

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Insurers weren't thrilled about those added, complex requirements. But there was grudging recognition that what had happened was dangerous and preventable -- and that the industry would have to cooperate with regulators to develop guidelines, procedures and practices to prevent solvency issues from threatening the industry. And it worked. We haven't seen repeats of the insurance company financial implosions of the early '90s, although solvency and capital requirements are still very much on the table as industry challenges that must be monitored (as the focus on the EU's Solvency II directive illustrates). Financial management, which encompasses everything from billing, to accounting and reporting, to portfolio management, has been elevated and become significantly more strategic for insurance companies.

[Insurers' Top Compliance Priorities: Dealing With State Regulations, Preventing Data Breaches ]

Other segments of financial services have not performed so well, however. Five years out from the subprime mortgage-driven global financial crisis, banks, lenders, capital markets firms and insurance companies are still dealing with its consequences. Which brings us to the Financial Stability Board's (chartered by the Group of 20 global finance ministers and central bankers) recent announcement designating an initial list of global systemically important insurers. These firms, which will be required to hold more capital and to enhance the quality of their capital instruments, are (U.K.) Aviva and Prudential; (U.S.) AIG, MetLife and Prudential Financial; (Germany) Allianz; (France) AXA; (Italy) Assicurazioni Generali; and (China) Ping An.

Insurance industry reaction has been relatively measured while also arguing that this process really isn't necessary. Leigh Ann Pusey, president and CEO of the American Insurance Association, noted in a statement: "AIA has repeatedly stated its view that the insurance business model and the regulated insurance activities that flow from that model do not pose a systemic threat. To the contrary, the insurance business model possesses features that add stability to the financial markets."

This view is understandable, but history has shown that on occasion even the most prominent financial institutions, including insurers, can fumble their performance. Sometimes preparing for the worst is the smartest strategy.

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio

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User Rank: Author
8/12/2013 | 1:04:00 PM
re: Implications Of The Global Systemically Important Insurers List
That is true but keep in mind that the transactions that weakened AIG and contributed to the crisis were not truly insurance transactions (underwriting, claims management, etc.). They were arcane financial/trading-related transactions. At the same time, I agree it is a bit disingenuous for these major insurance organizations, which do play a key role in the economy and financial stability, are not systemically important.
User Rank: Author
8/9/2013 | 8:59:15 PM
re: Implications Of The Global Systemically Important Insurers List
AIG wasn't adding any stability to the financial markets in the lead-up to the financial collapse and at the time it did pose a systemic threat. I think it's good to know that at least someone is paying particular to these institutions that are systemically important.
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