07 October 2014

Geneva Association: How should resolution regimes for insurers be established?

The recent financial crisis of 2008 shed light on resolution regimes and the resolvability of financial institutions. G20 leaders declared that resolution tools and frameworks for the effective resolution of financial groups would need to be developed in order to help mitigate the disruption caused by financial institution failures and reduce moral hazard in the future (G20, 2009).

In 2010, the Financial Stability Board (FSB) published a report entitled Reducing the Moral Hazard Posed by Systemically Important Financial Institutions: FSB Recommendations and Time Lines (2010) which recommended that “[a]ll jurisdictions should undertake the necessary legal reforms to ensure that they have in place a resolution regime which would make feasible the resolution of any financial institution without taxpayer exposure to loss from solvency support while protecting vital economic functions through mechanisms which make it possible for shareholders and unsecured and uninsured creditors to absorb losses in their order of seniority.”

In 2011 the Key Attributes of Effective Resolution Regimes for Financial Institutions, which set out core elements that the FSB considers necessary for an effective resolution regime, was endorsed at the G20 Cannes Summit. The 2013 G20 Leaders' Summit, held in St. Petersburg, declared that “[w]e renew our commitment to make any necessary reforms to implement fully the FSB’s Key Attributes of Effective Resolution Regimes for all parts of the financial sector that could cause systemic problems” (G20, 2013, §68).

A series of these resolution-related initiatives was not solely aimed at the banking sector. There is no denying that effective resolution regimes on a cross-border basis are necessary not only in the banking sector but also the insurance and non-bank/non-insurance sectors. Rather, development of such regimes would be critical for all financial sectors to ensure stability of the financial system and to incentivize financial institutions to operate globally.

When new regimes for financial sectors are designed, it is inevitable for policymakers to learn from past experience. Having experienced a series of insurer failures from the late 1990s to the early 2000s, Japan strengthened resolution regimes for insurers, taking lessons learned from those failures into consideration. Japan‘s experience can have implications for the development of global standards regarding resolution regimes for insurers.

This article investigates how resolution regimes for insurers have been strengthened in Japan and analyses how the developments in Japan can help the establishment of resolution regimes for insurers in the global context. The rest of this article is structured as follows. After the failures of insurers in Japan are outlined in Section 2, Section 3 describes how the resolution regime has been reinforced based on lessons learned from those events. Then, Section 4 analyses how experiences and achievements in Japan can help the development of international resolution regimes for insurers. Section 5 provides brief conclusions. Any opinions expressed in this article are the author’s personal ones and thus should not be regarded as the official opinion of the organization to which the author belongs.

The term “resolution” in this article is not necessarily limited to liquidation and winding-up of insurers. Rather, the term is intended to cover not only liquidation/winding-up but also recovery measures such as reorganization and rehabilitation.

Full newsletter

© Geneva Association