Too big to fail insurers will be forced to stockpile more capital

Marion Dakers
INTERNATIONAL regulators want “systemically important” insurance firms to hold extra capital to safeguard the rest of the financial system if they go bust.

The International Association of Insurance Supervisors set out plans yesterday to avoid insurers becoming too big to fail, by separating traditional insurance activities from riskier ones such as credit default swaps, and by holding “instruments comprising the highest quality capital” to cover losses.

“The proposed policy measures are intended to reduce moral hazard and the negative externalities stemming from the potential disorderly failure posed by global systemically important insurers,” said Peter Braumueller, head of the IAIS.

Regulators’ focus on insurers’ non-traditional activities stems from heavy losses absorbed by Swiss Re and AIG through credit default swaps that forced both to raise emergency funding during the 2008 crisis.

The G20’s Financial Stability Board will name the insurers deemed systemically important in April, with most of the new rules set to be introduced within 18 months.

Such firms will also be subject to closer scrutiny by regulators and will be required to draft “living wills” for winding themselves down if they ever fail.