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Regulators draw line between insurance, non-traditional activities

When it comes to insurance, international regulators appear willing to tolerate big – so long as big doesn’t equate to AIG.

Stephen Chernin/AP

When it comes to insurance, international regulators appear willing to tolerate big – so long as big doesn't equate to AIG.

The International Association of Insurance Supervisors (IAIS) Wednesday released proposed guidelines for regulating "global systemically important insurers" – or to use the vernacular made common by the financial crisis, those insurers that are "too big to fail."

Insurance companies are uncomfortable with this process, as we noted here a couple of weeks ago. Lobbies in Canada, the United States and elsewhere were making the point that insurance companies aren't banks, and should be spared the more restrictive requirements that now are demanded of big lenders such as JPMorgan Chase and Goldman Sachs.

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"Insurance companies are not systemically important," Frank Swedlove, president of the Canadian Life and Health Insurance Association, said in an interview Wednesday.

Mr. Swedlove, who also heads the global insurance lobby, declined to comment on the IAIS guidelines directly because he hadn't had a chance to read them. Based on previous discussions with regulators, he said he sensed that supervisors were becoming persuaded that insurance was distinct from banking. However, Mr. Swedlove said he remained concerned that supervisors think insurance companies still pose a risk simply being big. Mr. Swedlove said big insurance companies arguably are safer because they are better able to diversify risk across businesses and countries.

Canada's three biggest insurance companies – Manulife Financial Corp., Great-West Lifeco Inc. and Sun Life Financial Inc. – rank among the bottom half of the top 20 global insurance companies, based on market capitalization.

The emphasis of regulators appears to be on the non-traditional activities – such as the business of credit-default swaps – that caused the collapse of American International Group Inc., or AIG, during the financial crisis.

"The IAIS proposals take account of the specificities of insurance through the inclusion of plans for separating non-traditional, non-insurance (NTNI) activities from traditional insurance activities, the potential use of portfolio transfers and run-off arrangements, and the recognition of existing policy holder protection and guarantee schemes," the IAIS said in a press release.

The IAIS, which is writing the rules on behalf of the Financial Stability Board, proposes forcing systemically important insurers to hold extra capital to backstop only the so-called non-traditional activities. Still, the IAIS proposes that domestic authorities review the biggest insurers to make sure they are holding sufficient reserves.

In the U.S., the Property Casualty Insurers Association of America, or PCI, interpreted the guidelines as recognition traditional insurance poses no systemic threat to the financial system. However, the group wasn't declaring victory.

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"As international regulators attempt to draw distinctions between what constitutes traditional insurance activities and what should be considered non-insurance financial activities there is significant risk of overreach," David Snyder, PCI's vice president of international policy, said in a statement.

The IAIS is accepting comments on its proposals until December. The Group of 20's deadline for complete rules on systemically important insurers is April, 2013.

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