12 December 2012

John Gapper: Insurers must learn lessons from AIG

AIG has recovered from its multibillion-dollar losses but it still casts a long shadow over the insurance industry. The second-largest US insurer has placed its peers under suspicion, encouraging regulators to treat them like banks – more tightly regulated, holding more capital.

This annoys the world’s biggest insurers. “If you put higher capital requirements on insurance, you will have less insurance and lower growth”, says John Fitzpatrick, secretary-general of the Geneva Association, their trade body. “Why would central bankers who have the pedal to the floor to create growth want to depress it?”

Regulators have ignored similar arguments from banks in the past few years and they should discount this appeal too. Most insurance companies are smaller, sounder and safer than most banks but business is still being done in the name of insurance that has little resemblance to it. It would be foolish to forget the lesson of AIG the moment the US gets its money back.

Since the financial crisis, banks have been forced to hold more capital – especially too-big-to-fail banks that could have to be bailed out in future. It is sensible for regulators also to be more stringent with insurance holding companies. Otherwise, trading activities that become too costly for banks will simply transfer there.

This is so obvious that it is hardly worth debating. Global regulators are trying to match capital charges for systemically important banks such as JPMorgan Chase and Barclays with charges for systemically-important insurers. They are due to identify the latter shortly.

The insurers, however, are fighting back. The Geneva Association says it is happy for its members to be more strictly supervised than before (AIG’s regulator was previously the ill-fated Office of Thrift Supervision and is now the US Federal Reserve) but they don’t need extra capital.

An insurance group may genuinely be too big to fail – or too big to run a great risk of failure. “We have encouraged them to grow and to diversify to make them less dependent on reinsurance. We should not tell them the opposite now”, says one insurance regulator.

Nor are insurance companies especially big compared with banks. The Geneva Association estimates that the world’s biggest 28 insurance companies are, on average, a quarter of the size of the largest 28 banks. They have much smaller derivatives portfolios and are far less vulnerable to short-term funding being cut off.

But this only proves that regulators should not treat insurers exactly like banks. They aren’t doing so. The International Association of Insurance Supervisors has drafted new rules that attach relatively little importance to an insurer’s size and more to what it does.

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