The longer-term rating implications for insurers that the Group of 20's Financial Stability Board (FSB) has designated global systemically important insurers (G-SIIs) will be mixed, according to a report published by Standard & Poor's Ratings Services.
Titled "Possible Ratings Implications For Global Systemically Important Insurers," the report explains how the new requirements that the G-SII designation imposes have both positive and negative ramifications for the insurers in question.
"We see the requirements for G-SIIs to hold more capital and to enhance the quality of their capital instruments as positive for the ratings, all other things being equal," said Standard & Poor's credit analyst Rob Jones.
"However, at the same time, we believe these changes could lead to a higher cost of capital, which we generally see as ratings negative.
"In addition, G-SIIs will face heightened regulatory oversight, and this could also have either positive or negative repercussions-positive in terms of the potential avoidance or early detection of risk, and negative in terms of strategic constraints and regulatory burden."
At the same time, points out the report, the new requirements may motivate a G-SII to restructure-for example, by ring-fencing or divesting its systemically risky activities. A G-SII designation may also enhance the insurer's competitive position in the eyes of its customers and investors compared with non-G-SIIs.
The rating agency considers that some G-SIIs may try to exploit their new status by highlighting implied government support. However, it do not expect the new designation to change governments' behaviour toward G-SIIs or insurers generally. Unlike global systemically important banks (G-SIBs), no G-SII or other insurer benefits from direct government support, other than certain government-related entities.
Therefore it does not expect the new G-SII designation to change the way it differentiate between G-SIIs and G-SIBs in our analysis of banks and insurance companies. S & P's approach reflects that whereas most G-SIBs benefit from direct extraordinary government support from their domestic markets, G-SIIs do not. It does not anticipate that governments would provide capital or liquidity to insurers since their business models do not generally involve on-demand liabilities that are akin to bank deposits. Furthermore, insurers can generally be run-off(or "resolved" in banking parlance) in an orderly fashion, whereas banks generally cannot.
Nevertheless, there are two instances where insurers may benefit indirectly from government assistance. First, highly systemically important banks can utilize government support--should it become available--to support their core insurance subsidiaries. Second, governments can come to the aid of large insurers if they experience severe solvency difficulties that might otherwise disrupt the provision of insurance and have adverse social and employment consequences. Of the insurers listed, Allianz has accepted the FSB's decision but denies it poses a systemic risk, whilst Generali has accepted the designation without qualification.
|
