The International Association of Insurance Supervisors’ capital proposals for global systemically important insurers (GSIIs) do not plan to force GSIIs to hold extra capital, other than for specific non-traditional insurance businesses such as variable annuities and credit default protection, according to press reports this week. The focus on risk rather than just size would be in line with that underlying Fitch’s ratings.
The largest Fitch-rated global insurers already have strong capital positions, which support high ratings. Any limit on ratings is more associated with earnings power and market position than capital, although some insurers do have high debt leverage and additional capital could reduce this. The singling out of non-traditional businesses reflects the historical performance of large insurers, which with a few exceptions, such as AIG Financial Products and AEGON, have not required government support through the financial crisis.
The experience of AIG Financial Products in 2008 shows how some non-traditional businesses, such as credit derivatives and products with complex financial options and guarantees, can change insurers’ risk profiles, making them more susceptible to short-term risks. Traditional businesses are subject to long run-off periods, which reduces vulnerability to liquidity risk. This has been a key factor in insurers’ stability since the global financial crisis.
Most large insurers no longer underwrite the sort of products that got AIG Financial Products into trouble, but some non-traditional businesses have shorter pricing and performance track records that the IAIS is likely to investigate further. One of these is variable annuities (VAs). We consider them a potential source of risk and have addressed this in our ratings. For example, the rapid growth of variable annuity business at Jackson National Life, the US subsidiary of the UK insurance group Prudential Plc, was one of the reasons for our downgrade in 2010. VAs are largely a US product but other European insurers with significant US VA business are AEGON and AXA.
Insurers are lobbying against the proposals for GSIIs. This, and the long timeframe for implementation, mean that there is a significant chance that the proposals will be amended, possibly even abandoned, before implementation.
