International Association of Insurance Supervisors

Global Systemically Important Insurers:
Initial Assessment Methodology
18 July 2013

About the IAISThe International Association of Insurance Supervisors (IAIS) is a voluntary membershiporganization of insurance supervisors and regulators from more than 200 jurisdictions innearly 140 countries. The mission of the IAIS is to promote effective and globally consistentsupervision of the insurance industry in order to develop and maintain fair, safe and stable
insurance markets for the benefit and protection of policyholders and to contribute to global
financial stability.
Established in 1994, the IAIS is the international standard setting body responsible fordeveloping principles, standards and other supporting material for the supervision of theinsurance sector and assisting in their implementation. The IAIS also provides a forum forMembers to share their experiences and understanding of insurance supervision andinsurance markets. In addition to active participation of its Members, the IAIS benefits from
input in select IAIS activities from Observers representing international institutions,professional associations and insurance and reinsurance companies, as well as consultants
and other professionals.
The IAIS coordinates its work with other international financial policymakers and associationsof supervisors or regulators, and assists in shaping financial systems globally. In particular,
the IAIS is a member of the Financial Stability Board (FSB), founding member and co-parentof the Joint Forum, along with the Basel Committee on Banking Supervision (BCBS) and theInternational Organization of Securities Commissions (IOSCO), member of the Standards
Advisory Council of the International Accounting Standards Board (IASB), and partner in the
Access to Insurance Initiative (A2ii). In recognition of its collective expertise, the IAIS also isroutinely called upon by the G20 leaders and other international standard setting bodies for
input on insurance issues as well as on issues related to the regulation and supervision of
the global financial sector.

International Association of Insurance Supervisors
c/o Bank for International Settlements
CH-4002 Basel
Switzerland
Tel: +41 61 225 7300
Fax: +41 61 280 9151
www.iaisweb.org© International Association of Insurance Supervisors (IAIS), July 2013.
All rights reserved. Brief excerpts may be reproduced or translated provided the source isstated.

Page 2 of 25© IAISCover note
The global financial crisis underscored the interconnected nature of financial firms and thewidespread financial and economic costs of their severe distress or failure as well as withpublic sector interventions for those that were distressed or expected to fail. The crisis also
underscored the need for public authorities to act promptly and proactively to identify firmsthat are systemically important and to take measures to lessen the impact and reduce themoral hazard associated with public sector interventions and the distress or failure of such
firms.
As part of this effort, the International Association of Insurance Supervisors (IAIS) is
participating in a global initiative, along with other standard setters, central banks andfinancial sector supervisors, and under the purview of the Financial Stability Board (FSB) andG20, to identify global systemically important financial institutions (G-SIFIs 1). The focus of
the IAIS’ analysis is in relation to potential global systemically important insurers (G-SIIs).
The IAIS has developed an assessment methodology to identify insurance-dominatedfinancial conglomerates whose distress or disorderly failure, because of their size, complexity
and interconnectedness, would cause significant disruption to the global financial system andeconomic activity.
Interested parties may wish to consult relevant background papers which are available on
the IAIS, FSB and Basel Committee on Banking Supervision (BCBS) websites, including the
IAIS’ report Insurance and Financial Stability. 2 Other key papers include:
•

•
•
•

the IMF/FSB/Bank for International Settlements (BIS) staff report submitted to
the G20 Finance Ministers and Central Bank Governors entitled Guidance to Assess
the Systemic Importance of Financial Institutions, Markets and Instruments 3 (October2009);
the FSB’s recommendations on Reducing the moral hazard posed by systemicallyimportant financial institutions (SIFIs) 4 (October 2010);
the BCBS framework for identifying global systemically important banks (G-SIBs) andrequirements for additional loss absorbency for G-SIBs 5 (November 2011); andthe determination of the first cohort of G-SIBs 6 (November 2011).

1

G-SIFIs are defined by the FSB as “institutions of such size, market importance, and global
interconnectedness that their distress or failure would cause significant dislocation in the global financial
system and adverse economic consequences across a range of countries.” G-SIIs are one class of G-SIFIs.

2

See IAIS (2011) http://www.iaisweb.org/Other-papers-and-reports-46

3

See http://www.imf.org/external/np/g20/pdf/100109.pdf

4

See http://www.financialstabilityboard.org/publications/r_101111a.pdf

5

See http://www.bis.org/publ/bcbs207.pdf

6

See http://www.financialstabilityboard.org/publications/r_111104bb.pdf

Page 3 of 25© IAISGlossary of abbreviations
ART
BCBS
BIS
CDO
CDS
FSB
G-SIBsG-SIFIs
G-SIIs
G20
IAIS
ICPs
IFS
IGT
ILS
NTNI
SIFIs

Alternative Risk Transfer
Basel Committee on Banking Supervision (also Basel Committee)
Bank for International Settlements
Collateralised Debt Obligation
Credit Default Swap
Financial Stability Board
Global Systemically Important Banks
Global Systemically Important Financial Institutions
Global Systemically Important Insurers
Group of Twenty Countries
International Association of Insurance Supervisors
IAIS Insurance Core Principles
IAIS report Insurance and Financial Stability
Intra-group Transactions
Insurance-linked Securities
Non-traditional Insurance and Non-insurance activities
Systemically Important Financial Institutions

Page 4 of 25© IAIS

Contents

Cover note..............................................................................................................................3
Glossary of abbreviations .......................................................................................................4I.

Introduction ...................................................................................................................6A.

II.

Assessment methodology for systemic importance of G-SIIs ........................................ 9
A.

B.

III.

IAIS position on insurance and financial stability issues ....................................... 7
Data issues ........................................................................................................10(A)

Scope of data collection ............................................................................ 10(B)

Data quality ...............................................................................................11

Methodical assessment process ........................................................................ 12(A)

Indicator-based assessment approach ...................................................... 12(B)

IFS assessment approach......................................................................... 21(C)

Incorporating supervisory judgment and validation .................................... 21(D)

Designation Process ................................................................................. 23

Future steps ................................................................................................................23

Annex 1 – IFS Assessment Approach ..................................................................................24

Page 5 of 25© IAIS

I.

Introduction(1)

The International Association of Insurance Supervisors (IAIS) is participating in a
global initiative, along with other standard setters, central banks and financial sector
supervisors, and under the purview of the Financial Stability Board (FSB) and G20,
to identify global systemically important financial institutions (G-SIFIs 7). The focus of
the IAIS’ analysis is in relation to potential global systemically important insurers (GSIIs). To this end, the IAIS has developed this initial assessment methodology toidentify any insurers whose distress or disorderly failure, because of their size,
complexity and interconnectedness, would cause significant disruption to the global
financial system and economic activity. Any such insurers will be regarded assystemically important on a global basis.

(2)

At the Summit meeting in Seoul, November 2010, the G20 leaders endorsed the
FSB’s framework for reducing the moral hazard posed by systemically importantfinancial institutions. The framework recommends several policies which should
combine to:
•
•
•
•
•

(3)

Apply more intensive and co-ordinated supervision of SIFIs,
Improve the authorities’ ability to resolve SIFIs in an orderly manner without
destabilising the financial system and exposing the taxpayer to the risk of loss,
Require higher loss absorbency for SIFIs to reflect the greater risks that these
institutions pose to the global financial system,
Strengthen core financial infrastructures, andProvide other supplementary prudential and other requirements as determinedby the national authorities.

Initially, G-SIFI related work focussed on the banking sector, because that was amore immediate issue. The Basel Committee on Banking Supervision (BCBS)
developed a framework for identifying global systemically important banks (G-SIBs).
This framework, including requirements for additional loss absorbency, wascontained in a rule text published in November 2011. 8 The first list of 29 G-SIBs was

7

G-SIFIs are defined by the FSB as “institutions of such size, market importance, and global
interconnectedness that their distress or failure would cause significant dislocation in the global financial
system and adverse economic consequences across a range of countries.” Global systemically important
insurers (G-SIIs) are one class of G-SIFIs.

8

See http://www.bis.org/publ/bcbs207.pdf - the rules text includes the following comments: “During the recent
financial crisis that started in 2007, the failure or impairment of a number of large, global financial institutions
sent shocks through the financial system which, in turn, harmed the real economy. Supervisors and otherrelevant authorities had limited options to prevent problems affecting individual firms from spreading andthereby undermining financial stability. As a consequence, public sector intervention to restore financial
stability during the crisis was necessary and conducted on a massive scale. Both the financial and economic
costs of these interventions and the associated increase in moral hazard mean that additional measures need
to be put in place to reduce the likelihood and severity of problems that emanate from the failure of global
systemically important financial institutions (G-SIFIs). … A number of the policy measures will have aparticular impact on global systemically important banks (G-SIBs), given their business models have generally
placed greater emphasis on trading and capital markets related activities, which are most affected by theenhanced risk coverage of the capital framework. These policy measures are significant but are not sufficientto address the negative externalities posed by G-SIBs nor are they adequate to protect the system from thePage 6 of 25© IAIS

disclosed by the FSB at the same time. 9 The BCBS commented: “There is no single
solution to the externalities posed by G-SIBs. Hence the official community isaddressing the issues through a multipronged approach. The broad aims of thepolicies are to reduce the probability of failure of G-SIBs by increasing their goingconcern loss absorbency and to reduce the extent or impact of failure of G-SIBs, byimproving global recovery and resolution frameworks.”(4)

It was foreshadowed in the FSB’s October 2010 report that the framework fordealing with G-SIFIs would be extended to cover insurance companies. 10 G20
Leaders, at Cannes in November 2011, reiterated their expectation for the IAIS tocomplete its assessment methodology for identifying G-SIIs. 11(5)Given the importance of stable financial markets and recognising that part of its
mission is to contribute to global financial stability, as stated in its By-Laws, the IAIS
has been examining the issue intensively.

(6)This document sets out the results of the IAIS work and describes the IAIS
assessment methodology for assessing systemically important insurers.

A.

IAIS position on insurance and financial stability issues(7)

In developing the methodology, consideration was given to the fact that thetraditional insurance business model is different from banking and, in particular, thattraditional business does not involve payment system, credit intermediation or
investment banking services. In November 2011, the IAIS published a report entitled
Insurance and Financial Stability that describes the IAIS’ view of the relationshipbetween the insurance sector and financial stability. This paper followed publicationof a June 2010 position statement stressing the importance of the longer timeframe

wider spill over risks of G-SIBs. The rationale for adopting additional policy measures for G-SIBs is based on
the cross-border negative externalities created by systemically important banks which current regulatory
policies do not fully address.”9

See http://www.financialstabilityboard.org/publications/r_111104bb.pdf FSB (2011) “[The] initial list is based on
the methodology set out in the BCBS document Global systemically important banks: Assessment
methodology and the additional loss absorbency requirement, using data as of end-2009. The list of G-SIFIs
will be updated annually and published in November every year. Therefore, the list will not be fixed – there canbe new entries and exits every year and the number of G-SIFIs may change. The BCBS methodology will be
reviewed every three years to capture changes in the banking system and progress in measuring systemic
importance. The present list contains global systemically important banking groups; future lists may also
contain G-SIFIs that are not banking groups.”

10

See http://www.financialstabilityboard.org/publications/r_101111a.pdf. FSB (2010) states: “As experience isgained, the FSB will review how to extend the framework to cover a wider group of SIFIs, including financial
market infrastructures, insurance companies and other non-bank financial institutions that are not part of abanking group structure.”11

See http://www.financialstabilityboard.org/publications/r_111104bb.pdf FSB (2011) “Policy Measures toAddress Systemically Important Financial Institutions.” Also requested that the IAIS “pursue its work to develop
a Common Framework for the Supervision of Internationally Active Insurance Groups by 2013, in order tofoster group wide supervision and global convergence of regulatory and supervisory approaches.”

Page 7 of 25© IAIS

that applies to insurance liabilities 12 and the importance of insurance techniques that
rest on the pooling of insurance risks, including the notion of insurable interest. 13
The remainder of Section I summarises the most important conclusions of these
papers relevant to developing the methodology.
(8)

Insurance is founded on the law of large numbers, which basically states that theaggregation of a large number of idiosyncratic risks ultimately results in a normal
curve of distribution. It is therefore fair to say that the business model of insurance isbased upon the assumption of a large number of ideally uncorrelated risks frompolicyholders to build up and maintain a well-diversified portfolio. In practice, thismeans that with an increasing portfolio there is less opportunity for unexpected
results and a lower probability of very large losses (in relation to the entire portfolio).
The risk profile of an insurer becomes less risky the more risks are assumed, i.e. thelarger it is and the more diversified its business is (the more lines of business it
writes).

(9)

The insurance business underwrites risks, and insurance claims become due upon
the occurrence of idiosyncratic claims events that relate to:•Mortality,•
Morbidity,•
Property, and•Liability risks.

(10)

The insurance business model also has several unique features which are nottypically found in banking, such as:•
Insurance techniques rest on the pooling of insurance risks and probability
theory such as the law of large numbers,•
Insurers undertake a predominantly liability-driven investment approach,•The nature of insurance claims results in cash outflows that can occur overan extended period of time, and•A high degree of substitutability.

(11)

In general, insurance underwriting risks are not correlated with the economic
business cycle and financial market risks and the magnitude of insurance events is
not affected by financial market losses. The nature of insurance liabilities, and thefact that payments to policyholders generally require the occurrence of an insured
event, makes it less likely for insurers engaged in traditional activities to suffer
sudden cash runs that would drain liquidity.

12

See IAIS (2010) http://www.iaisweb.org/Other-papers-and-reports-46: “In spite of this, insurers sometimes
become financially distressed and, in a competitive market, financial distress and insolvencies may occur fromtime to time. The financial distress of an insurer usually plays out over a long time horizon. That is, assets of
the insurer do not need to be liquidated until claims or benefits under the policies need to be paid, and this will
not occur until months or even years in the future. Accordingly, regulators usually have the time to intervene to
reduce potential losses to policyholders from the insolvency.”

13

See IAIS (2011) “Insurable interest can be defined as an interest in a person or a good that will support theissuance of an insurance policy; an interest in the survival of the insured or in the preservation of the good thatis insured. … Financial derivatives are not considered insurance for regulatory purposes.”

Page 8 of 25© IAIS(12)Insurers are, however, also exposed to risks faced by other financial institutions,
including credit risk, operational risk, and market risk as well as interest rate andexchange rate risks. Nevertheless, the unique aspects of the insurance businessmodel described above enabled most insurers to withstand the financial crisis of
2008-09 better than other financial institutions. While the effects of the crisis werecertainly felt by the insurance industry, insurers engaged in traditional insurance
activities in general were able to absorb the impact and demonstrated no impact on
the broader financial system from a systemic risk perspective.

(13)

In contrast, insurance groups and conglomerates that engage in non-traditional (NT)or non-insurance (NI) activities can be more vulnerable to financial market
developments and may therefore be more likely to amplify, or contribute to, systemic
risk, than traditional insurers. Examples of non-traditional and non-insurance
activities include financial guaranty insurance, capital markets activities such as
credit default swaps (CDS), transactions for non-hedging purposes, derivatives
trading or leveraging assets to enhance investment returns. In addition, thecontinually evolving marketplace is resulting in products and activities that blur thelines between traditional insurance and bank-type (or investment bank-type)activities.

(14)

For a more specific discussion and definition of NTNI activities, please refer tosection 3.2 of the G-SII Policy Measures paper.

(15)

In summary, neither long experience of insurance markets nor information arisingfrom the global financial crisis provides any evidence of traditional insurance either
generating or amplifying systemic risk within the financial system or in the real
economy. The potential for systemic importance is only considered to arise in any
non-traditional or non-insurance activities.

(16)

However, empirical assessments of the systemic importance of insurers andinsurance groups may change over time. A benign record in the past does not
ensure the absence of a systemic risk potential in the future. That is why the IAIS iscommitted to reviewing the pace of innovation and change in insurance businessmodels and assessing the potential for individual insurers to be classified assystemic.

II.

Assessment methodology for systemic importance of G-SIIs(17)

The IAIS has developed an initial assessment methodology to assess the systemic
importance of G-SIIs and applied that methodology using year-end 2011 datacollected from selected insurers in 2012. The initial assessment methodology
involves three steps: collection of data, 14 methodical assessment and a supervisoryjudgment and validation process. This section describes how these three steps wereincorporated into the IAIS assessment methodology.

14

The Bank for International Settlements (BIS) collaborated with the IAIS by providing secured transmission
channels for the collection of confidential data.

Page 9 of 25© IAIS(18)This section first describes the scope of data collection and the challenges the IAIS
encountered. Following this, the initial assessment approach is described. Finally,
the initial modality of the supervisory judgment and validation process is explained.

(19)

The initial assessment approach is indicator-based and has several advantages 15
and similarities to the approach developed by the BCBS for G-SIBs. For example,
there is considerable overlap in the categories of indicators. However, insurers vary
widely from banks in their structures and activities and consequently in the natureand degree of risks they pose to the global financial system. Thus, the particular
indicators selected for identifying G-SIIs reflect different drivers of possible negative
externalities and hence of the importance of insurers for the stability of the financial
system.

(20)

As indicated by the BCBS, no assessment approach will perfectly measure systemic
importance across all global financial institutions. Thus, similar to the BCBS
approach in identifying G-SIBs, the IAIS methodology also recognises theimportance of supervisory judgment and validation of the results flowing from theindicator approach. The IAIS supervisory judgment and validation process includes
additional qualitative and quantitative assessments, including the selection ofcandidates for the process.

(21)

The additional quantitative assessment takes the form of a business segment
specific risk-weight assessment approach that is structurally aligned with theconcepts described in Insurance and Financial Stability. This approach is referred toas the “IFS assessment approach.” The IFS assessment approach centres aroundsegmenting the business portfolio of insurance companies and insurance-dominatedgroups and conglomerates in traditional insurance, semi- and non-traditional
insurance activities as well as non-insurance financial and non-insurance industrial
activities, as the systemic importance of the aforementioned business activities
ranges from marginal (in traditional insurance) to potentially significant (in noninsurance financial activities, e.g. banking).

A.

Data issues(A)

Scope of data collection(22)

The dynamic nature of insurers’ business models and the financial markets in which
they operate means assessing the systemic importance of insurers requires recent,consistent and good quality data. Because many of the data items are either not
publicly available or not publicly available on a consistent basis, the IAIS collected
relevant data items from selected global insurance groups. The IAIS requested
insurers to report data to their respective supervisors as of year-end 2011, based ongroup level data consolidated for accounting purposes, including all insurance

15

As indicated by the Basel Committee, “The advantage of the multiple indicator-based measurement approachis that it encompasses many dimensions of systemic importance, is relatively simple, and is more robust thancurrently available model-based measurement approaches and methodologies that only rely on a small set ofindicators or market variables.” See http://www.bis.org/publ/bcbs207.pdf.

Page 10 of 25© IAIS

entities and non-insurance entities. Some data items were difficult for all insurers toprovide on a consolidated basis and aggregate data reflecting major entities in thegroup may have been reported instead.
(23)

Data was requested and obtained through the respective national supervisors from50 insurers in 14 jurisdictions selected according to the following criteria:•
Insurance groups whose total assets were USD 60 billion or more andwhose ratio of premiums from jurisdictions outside the home jurisdiction tototal premiums was 5% or more.
•
Insurance groups whose total assets were USD 200 billion or more andwhose ratio of premiums from jurisdictions outside the home jurisdiction tototal premiums was between 0% and 5%.
•
Finally, a few insurers, such as financial guaranty insurers, were added tothe scope by supervisory judgment.

(B)

Data quality(24)

Unlike the banking sector where BIS statistics cover various areas of banking
activities on a global basis, the IAIS had few precedents for collecting data on a
global basis for the insurance sector. One such precedent is the data collected forthe IAIS Global Reinsurance Market Reports 16 which the IAIS has been collecting
for almost ten years. However, the nature, scope and scale of the data collected totest the G-SII assessment methodology is a significant new undertaking for the IAIS.
The IAIS encountered several challenges to collecting consistent and high quality
data, including:•Insurers’ management information systems do not necessarily provide allconsolidated data items which were requested by the IAIS. 17•
Accounting differences exist, including differences in valuation of someassets, derivatives, insurance contracts and technical provisions.
•
Jurisdictional or regional differences exist in the interpretation of someinsurance business terms.
•
Definitions provided for some data items could be made more specific. 18(25)

In cooperation with the respective national supervisors, the IAIS improved the data
quality and consistency by comparing information to public sources where available
and, where appropriate, by further consulting with relevant supervisors. The
adjusted data was considered satisfactory for developing a proposed assessment
methodology.

16

See http://iaisweb.org/Global-Reinsurance-Market-Report-GRMR-538. In 2012, the IAIS merged this report
into a Global Insurance Market Report, which documents the performance of primary insurers and reinsurers
as well as key developments in the global insurance market.

17

Unlike the role played by the BIS and the BCBS for the banking sector, there is no consolidated regulatory datacollection for the insurance sector by the IAIS.

18

Due to the reasons given above, establishing definitions that are sufficiently clear and comparable acrossjurisdictions/regions is a challenge.

Page 11 of 25© IAIS

(26)Where considered material, adjustments were made to relevant data items to focus
on financial activities by the selective exclusion of non-financial subsidiaries fromconsolidated group-wide metrics.

B.
(27)

Methodical assessment process
Global systemic importance needs to be primarily measured in terms of the impactthat distress or failure of an insurer may have on the global financial system and thewider economy rather than in terms of the probability of a failure. This is consistent
with the BCBS approach.

(A)

Indicator-based assessment approach(28)

The indicator-based assessment approach is related to the BCBS’s G-SIB
methodology. However, the specific nature of the insurance sector, as described inInsurance and Financial Stability, has influenced the selection, grouping and weights
assigned to certain indicators.

(29)

The selected indicators are grouped into five categories:•
Size: The importance of a single component for the working of the financial
system generally increases with the amount of financial services that thecomponent provides. It should be recognised, however, that in an
insurance context size is a prerequisite for the effective pooling anddiversification of risks.
•
Global Activity: The methodology is aimed at identifying components of thefinancial system whose failure can have large negative externalities on a
global scale.
•Interconnectedness: Systemic risk can arise through direct and indirectinter-linkages between the components of the financial system so that
individual failure or distress has repercussions around the financial system,
leading to a reduction in the aggregate amount of services.
•
Non-traditional and non-insurance activities: As described in Insurance andFinancial Stability, non-traditional insurance activities and non-insurance
financial activities are potential drivers of the systemic importance of
insurers and thus have the greatest impact upon failure.
•
Substitutability: The systemic importance of a single component increases
in cases where it is difficult for the components of the system to provide thesame or similar services in the event of failure.

(30)

The IAIS has identified indicators which contribute to capturing the degree andnature of each insurer’s systemic importance in each of the five categories frommultiple-dimensions. The following table describes the 20 indicators chosen for the
initial assessment methodology and the reasons for choosing them. To capture
impact given failure, indicators are mostly incorporated as absolute value figures,
although in some cases ratios are also used to capture a relative impact given
failure, typically comparing the size of a given activity with a relevant aggregate
measure.

Page 12 of 25© IAIS

Table 1. Five categories of the IAIS indicator-based assessment approach.
Category: Size
Indicator

Content[with adjustments applied to2011 data by Analysis Team]

Total assets

Total on balance sheet asset size

Total revenues

Sum of insurance gross premium
earned, investment income,realised gains and losses, fees andcommissions, and other income

Rationale
Straightforward indicator of size
Indicates the extent or scale offinancial services of an insurer
from a different angle(Looking at only asset size mayunderestimate activities of non-life
insurers)

Category: Global activity
Indicator

Content[with adjustments applied to2011 data by Analysis Team]

Rationale

Revenues
derived outsideof home country

Sum of the total revenues
recognised from jurisdictions
outside the home country

Indicates the extent of global
activity from a revenue perspective

Number ofcountries

Number of countries where a group
operates with branches and/or
subsidiaries outside of the homecountry

Indicates the extent of global
activity from an operational
perspective

Category: Interconnectedness
Content[with adjustments applied to2011 data by Analysis Team]

Rationale

Intra-financial
assetsSum of lending to financial
institutions and holdings of
securities (debt securities,
commercial paper, certificates ofdeposit and equity) issued by otherfinancial institutions

Indicates the potential for failure or
distress of an insurer to impact thefinancial system through fire salesof assets

Intra-financial
liabilities

Sum of borrowing from financial
institutions and issuance of
securities (debt securities,
commercial paper and certificatesof deposit) owned by other financial

Indicates the degree to which
failure or distress of an insurer
could impact those with exposures
to it

Indicator

Page 13 of 25© IAISCategory: Interconnectedness
Indicator

Content[with adjustments applied to2011 data by Analysis Team]

Rationaleinstitutions

Reinsurance

Derivatives

Gross technical provisions forreinsurance assumed business
Gross notional amounts ofderivatives outstanding[including some types of embedded
derivatives with 2011 data]

Indicates the degree ofinterconnectedness with theinsurance sector throughreinsurance transactions
Indicates the degree ofinterconnectedness with thefinancial system throughderivatives transactions

Combination of:Large exposures(This indicator
will be reviewed
prior to data
analysis in futureyears).

(a) Total asset exposures to the 19
largest counterparties (including
counterparties in derivativetransactions but excluding
domestic sovereign debt andseparate account assets), and(b) Ratio of total asset exposures
to the 19 largest counterparties tototal assets (excluding separate
account assets)(c) Ratio of domestic sovereign
exposure to its market size

Indicates the degree ofinterconnectedness focusing on
concentrations in asset exposures
to major counterparties
In its ratio form this indicator could
point towards insurers that have ahigher degree of concentrations inassetsTwo ratios:(a) Ratio of total purchase ofinvested assets* plus total sale ofinvested assets to total assets, andTurnover(b) Ratio of total sales (issuance) offunding liabilities* plus total
retirement of funding liabilities tototal liabilities

This indicator could point towards
insurers that are more active in thecapital markets than is normal fora traditional insurance business*in accordance with cash flow
statements
Level 3 assets

Indicates the potential scale of firesales of illiquid assets by an

Combination of:Page 14 of 25© IAISCategory: Interconnectedness
Indicator

Content[with adjustments applied to2011 data by Analysis Team](a) Total level 3 assets, and(b) Ratio of total level 3 assets tosum of level 1, 2 and 3 assets 19[excluding the ratio for insurers
added to the scope via supervisoryjudgment with 2011 data]

19

Rationale
insurer in distressed financial
market situations
In its ratio form it could point
towards insurers that are more
active in markets for complex
assets than is normal for a
traditional insurance business

Level 1 Assets are based on unadjusted, quoted prices for identical assets in an active market. Level 2 Assets
are based on quoted prices in inactive markets, or whose values are based on models - but the inputs to thosemodels are observable either directly or indirectly for substantially the full term of the asset. Level 3 Assets are
based on prices or valuation techniques that require inputs that are both unobservable and significant to theoverall fair value measurement.

Page 15 of 25© IAISCategory: Non-traditional insurance and non-insurance (NTNI) activities
Indicator

Content[with adjustments applied to2011 data by Analysis Team]
Combination of:

Non-policy holder
liabilities andnon-insurance
revenues fromfinancial activities*(a) Total on balance sheet liabilities
minus all policyholder liabilities,*(b) Ratio of (a) to total on balance
sheet liabilities,(c) Total revenues from financial
activities of non-insurance
businesses, and(d) Ratio of (c) to total revenues* all technical provisions held for
fulfilling insurance contracts

Derivatives
trading

Gross notional amount of CDS
protection sold

Rationale
Indicates the extent to which an
insurer conducts NTNI activities
using both balance sheet andrevenue figures
Policyholder liabilities are a proxy
for traditional insurance activities:“total liabilities minus policyholder
liabilities” indicates NTNI activities
In its ratio form it could point
towards insurers that do more
NTNI activities than is normal for
traditional insurers
Indicates the scale of CDS
protection sold which links aninsurer with other parts of thefinancial system
An insurer’s distress or failure
could impact financial positions ofbuyers of CDS protection

Combination of:(a) Absolute sum of:• Short term borrowing,• Commercial paper issued,• Certificates of deposit issued,
Short term
funding• Gross value of collateral
received from repos, and• Gross value of collateral
received from securities lent;and(b) Ratio of sum of the above
mentioned items to total assets
Sum of:Financialguarantees(a) Gross notional amount of debt
securities including structured
finance insured for financial
guarantee. Not including CDS

Page 16 of 25

Indicates the extent to which an
insurer could be involved inmaturity transformation
A large degree of short-term
funding is a feature of financial
institutions involved in maturity
transformation
Ratios pointing to a larger-thannormal amount of short-term
funding could signal an insurer
venturing into this kind of businessand assuming the liquidity risks
that come with it, including thepotential for fire sales of assets
Financial guarantee and mortgage
guarantee products link an insurer
with other parts of the market andare correlated with the economic
cycle© IAISCategory: Non-traditional insurance and non-insurance (NTNI) activities
Indicator

Content[with adjustments applied to2011 data by Analysis Team]
protection sold or surety bonds,
and(b) Risk in force for mortgage
guarantee insurance, which is thegross mortgage default amountcovered by all mortgage insurance
policies issued

Minimumguarantee on
variableinsurance
products

Total technical provisions forvariable annuities and contingent
annuities including additional
technical provisions for any
guarantees[Greater of the account value of alllife insurance and annuity productsthat provide protection against
financial risk and the assetsbacking these products used with2011 data]

Rationale
An insurer’s distress and failure
could impact the financial positionsof guaranteed parties

Variable insurance products(including variable annuities andunit linked products with capital
protection) most often include
some type of guaranteed levels of
payment to policyholders:
attempting to pay guaranteedamounts could accelerate asset
sales by an insurer andexacerbate already distressedmarket conditions
There is also the possibility that
hedging strategies for guarantees
could adversely affect markets intimes of wider market stress

Combination of:

Intra-group
commitments(a) Intra-group commitments
granted by insurance entities or the
top holding company of an
insurance group for the benefit of
non-insurance entities of the groupand intra-group commitments
granted by non-insurance entities
to any other entities in the group,
and(b) Ratio of intra-group
commitments granted by insurance
entities or the top holding companyof an insurance group for the
benefit of non-insurance entities of
the group and intra-group
commitments granted by noninsurance entities to any otherentities in the group to total assets[A maximum of shareholders equity
applies to (a) with 2011 data]

Page 17 of 25

A large amount of intra-groupsupport given to the nontraditional / non-insurance entitiesof the group may indicate
significant NTNI activities and/orlack of self-sufficiency of NTNI
activities
Many intra-group commitments
can also indicate a complex
company structure and greaterdifficulties in resolving an
insurance group or conglomerate
The ratio is used to account for thefact that the size of intra-group
commitments could overestimate(underestimate) the issue in caseof a large- (small-) sized insurancecompany© IAISCategory: Non-traditional insurance and non-insurance (NTNI) activities
Indicator

Content[with adjustments applied to2011 data by Analysis Team]

Rationale[excluding the ratio for insurers
added to the scope via supervisoryjudgment with 2011 data]

Derivatives
trading(excluding
hedging andreplication) in
economic terms

Extent of liquidityof insurance
liabilities

Gross notional amount of the
NTNI-related portion and the nonNTNI-related of derivatives
excluding “hedge reducing risks”
and “hedge replicating risks”[Not used with 2011 data]

Amount of liabilities that can besurrendered upon request within 3months without economic penalty
plus 50% of the amount of liabilities
that can be surrendered witheconomic penalty (such as fees ortax) lower than 20%[Amounts regardless of the timeline
threshold were used with 2011
data]

Page 18 of 25

Indicates the degree of speculative
derivatives trading

Indicates the potential for an“insurance run” to occur because
the liabilities are more exposed tobeing “on demand” than traditional
insurance liabilities© IAIS

Indicator

Category: Substitutability
Content[with adjustments applied to2011 data by Analysis Team]
Combination of:

Rationale(a) Direct gross premiums written
and assumed premiums forcatastrophe coverage

Premiums for
specific businesslines(b) Direct gross premiums written
and assumed premiums for credit
coverage including mortgage
guarantee coverage, financial
guarantee and export credit
coverage,(c) Direct gross premiums written
and assumed premiums foraviation coverage, andIndicates the degree of lack of
substitutability in some specificinsurance markets
The three markets selected areconsidered to be significant andhighly concentrated markets in a
global context(d) Direct gross premiums written
and assumed premiums for marine
coverage(31)

As discussed in Insurance and Financial Stability, the two most important categories
for assessing the systemic importance of insurers are the NTNI category and theinterconnectedness category. Non-traditional and non-insurance activities areimportant because the longer timeframe over which insurance liabilities can normallybe managed may not be present, and interconnectedness is important because
there can be strong connections between the insurance and banking sectors.
Therefore, these indicators receive higher weights.

(32)

Consequently, the size, global activity and substitutability categories are given lower
weights. This is consistent with the risk diversification benefits that can accrue withgreater size of traditional insurance activities and global spread, and the usual
speed with which loss of insurance capacity is replaced by new entrants into themarket. Size and global activity indicators were also used in the initial selection of
those insurers included in the scope of the data collection exercise. Furthermore,
analysis also shows that several of the indicators in other categories are to someextent correlated with size. Assigning a lower weight to the size category avoids
allowing size a disproportionate influence on the overall result. Although not a
separate category of its own (as in the BCBS’s approach), complexity has been
captured by some of the indicators within the other categories (e.g. intra-group
commitments).

(33)

Taking these factors into consideration, higher weights are given to the nontraditional insurance and non-insurance activities category and theinterconnectedness category, while lower weights are given to the other three
categories. Following review of various scenarios, the weighting for the nontraditional insurance and non-insurance category is 45%, the weighting for theinterconnectedness category is 40%, and the weighting for each of the other three
categories is 5%. Within all five categories, equal weight is given to each indicator.

Page 19 of 25© IAIS

Table 2. Weights given to each category and individual indicator

Category

Size

Category
weighting5%

Global activity

5%Interconnectedness 40%

Non-traditional
insurance and noninsurance activities

Substitutability

45%

5%

Individual indicator

Indicator
weighting[for 2011 data]

Total assets

2.5%

Total revenues

2.5%

Revenues derived outside of homecountry

2.5%

Number of countries

2.5%

Intra-financial assets

5.7%

Intra-financial liabilities

5.7%

Reinsurance

5.7%

Derivatives

5.7%

Large exposures

5.7%

Turnover5.7%

Level 3 assets

5.7%

Non-policy holder liabilities andnon-insurance revenues

6.4%

Derivatives trading

6.4%

Short term funding

6.4%

Financial guarantees

6.4%

Minimum guarantee on variableinsurance products

6.4%

Intra-group commitments

6.4%

Liability liquidity

6.4%

Premiums for specific business
lines

5%

(34)

For each insurer, the score for a particular indicator is calculated by dividing theindividual insurer amount by the aggregate amount summed across all insurers inthe sample. When an indicator consists of a combination of sub-indicators, the same
calculation will be done for each sub-indicator; the results will be averaged to reachthe score for the indicator overall.

(35)

The score is weighted by the indicator weighting within each category. Then, all theweighted scores are added. For example, the total asset size indicator for an insurerthat accounts for 10% of the sample aggregate total asset size variable will receive
a score of 10%. If the indicator weighting for the total asset size is X%, it willcontribute (10%) x (X%) to the total score for the insurer. Similarly, if the indicator

Page 20 of 25© IAISweighting for the total intra-financial assets is Y%, an insurer that accounts for 10%
of intra-financial assets will receive a score of 10% that will in turn contribute (10%)
x (Y%) to the total score for the insurer. Summing the scores for all indicators gives
the total score for the insurer. The maximum possible total score (i.e. if there were
only one insurer in the world) is 100%; if an insurer accounts for 10% of each of theindicators, its total score is be 10%.
(B)

IFS assessment approach(36)

The IFS assessment approach is more directly based on the concepts described inInsurance and Financial Stability. It adopts a business segment specific approach.

(37)

In essence, the IFS assessment approach segments the business portfolio of an
insurer into its traditional insurance, semi- and non-traditional insurance as well as
non-insurance financial and industrial activities. Then, the assessment approachassociates risk weights commensurate with the systemic importance of the various
business activities of insurance companies. The risk weights are multiplicative
factors of total assets broken down along the segmentation of the business portfolio
of insurance companies. The risk weights reflect the IAIS position that systemic
importance in insurance is primarily associated with the conduct of non-insurance
financial and non-traditional insurance business. The IFS assessment approach wasused as an additional source of information during the supervisory judgment andvalidation process.

(38)

Both the indicator-based and the IFS assessment approach are consistent with theconcepts expressed in Insurance and Financial Stability. The supervisory judgment
and validation phase of the overall methodology produces a more robust
assessment of the systemic importance of insurers supporting the results of theindicator-based assessment approach with the segment-based IFS assessment
approach. The IFS assessment approach does not use indicators as proxies ofsystemic importance that may potentially fail to cover certain risky activities, but
assesses each segment of business comprehensively on its own.

(39)

Further information on the approach is contained in Annex 1.

(C)

Incorporating supervisory judgment and validation(40)

The indicator-based approach was used to provide a first indication of the relative
importance of insurers within the scope of the G-SII analysis and also to provide alist of G-SII candidates, with additional candidates selected from results of the IFS
assessment approach.

(41)

It is recognised, however, that using the indicator-based assessment on its own may
not be sufficient to determine whether the resulting candidates are in factsystemically important. Additional explanatory information and analyses may berequired, including in cases where both assessment approaches diverge. Suchadditional information and analysis may be needed, for example, in order to:•
Enhance the understanding of the data flowing into the indicators andproduce a more accurate interpretation of the indicator results.
•
Reveal extenuating circumstances that cannot be easily quantified in theform of an indicator, e.g. a major restructuring or run-off situation.

Page 21 of 25© IAIS••••

Provide information on the extent and nature of risks associated with aparticular type of semi-traditional or non-traditional insurance activity and its
systemic relevance.
Provide for an assessment of the liquidity aspects of the insurer’s specificproducts/liabilities and whether such liquidity calls might have systemic
implications for the global economy.
Provide for a more in-depth understanding of the nature and extent of thefirm’s interconnections with other financial counterparties.
Provide for a more nuanced assessment of the systemic risk implications of
intra-group guarantees and off balance sheet risks.

(42)

On this basis, the IAIS held discussions with the relevant group-wide supervisors ofeach G-SII candidate to obtain their views on the results of the calculations. Basedon the assessments, and further informed by their discussions with relevant groupwide supervisors, the IAIS determined where additional analysis was required. Insuch cases, the IAIS obtained additional information on selected G-SII candidates
from public sources and supervisors.

(43)

However, it is important to note that regardless of the results of the indicator-based
and IFS assessment approaches, the IAIS will conduct discussions with relevantsupervisors who suggest that an insurer should be added to the list of G-SII
candidates.

(44)

This additional layer of analyses will be conducted in an effective and transparent
way. To the extent that such additional inputs alter the results flowing from theindicator-based and IFS assessment approaches, such judgments should be
supported by verifiable arguments.

(45)

It is possible that a particular supervisor or supervisors may challenge the results ofthe findings of the assessment methodology. In such cases, the IAIS will scrutinise
the justification for such arguments.

(46)

In summary, the IAIS will adhere to the following general principles whenincorporating supervisory inputs into the process:•The bar for judgmental adjustment to the output of the initial quantitative
analyses should be high.
•The process should focus on impact to the global financial system of an
insurer’s failure, not its probability of failure or distress.
•
The judgmental overlay should comprise well-documented and verifiable
information.

(47)

The process for incorporating additional inputs is:•Collection of the data and supervisory commentary for all insurers in thescope of the data collection,•
Methodical application of the indicator-based approach, supported by the
IFS assessment approach,•For those insurers that are G-SII candidates, discussion with supervisors
and additional analyses as may be required,•
IAIS recommendations to FSB on potential G-SIIs, andPage 22 of 25© IAIS•FSB and national authorities, in consultation with the IAIS, drawing on
relevant qualitative and quantitative indicators, determining the cohort ofany G-SIIs.

(D)

Designation Process(48)

Following the ranking of insurers according to the indicator-based assessment
approach and the supervisory judgement and validation process, the FSB andnational authorities, in consultation with the IAIS, determined the cohort of G-SIIs.

III.

Future steps(49)

The assessment methodology may be revised at least every three years. Althoughchanging the methodology too often will disturb the business planning of insurers,changes in the overall economy and insurance markets should be reflected in theassessment methodology.

Page 23 of 25© IAISAnnex 1 – IFS Assessment Approach

A-1

The IFS assessment approach embodies key notions of the Insurance and Financial
Stability report of the IAIS. It builds on the segmentation of the business portfolio of
insurers and insurance-dominated groups and conglomerates into the traditional
insurance, semi- and non-traditional insurance activities as well as the noninsurance financial and non-insurance industrial activities as the systemic
importance of these business activities spans a spectrum ranging from marginal (intraditional insurance) to considerable (in non-insurance financial activities, e.g.
banking).

A-2

In essence, the IFS assessment approach segments the business portfolio of an
insurer into its traditional insurance, semi- and non-traditional insurance as well as
non-insurance financial and industrial activities. Then the assessment approachassociates risk weights commensurate with the systemic importance of the businessactivities of insurance companies. The risk weights are multiplicative factors of total
assets broken down along the same segmentation of the business portfolio of an
insurance group. The risk weights reflect the IAIS position that systemic importancein insurance is primarily associated with the conduct of non-insurance financial andnon-traditional insurance business. Table 1 lists the risk weights under consideration
with the insurance business portfolio of insurance companies broken down into its
traditional, semi-traditional and non-traditional insurance activities.

Table 1. Risk weights applied to 2011 data
INSURANCE
Underwriting and supporting
investment / treasury functions

Traditional

Semi-traditional

Non-traditional

2.5%/20%

12.5%/50%

22.5%/75%

NON-INSURANCE
Financial activities
NON-INSURANCE
Industrial activities

100%
0%

A-3

The IFS assessment approach does not assume that traditional insurance businessmay never gain systemic importance nor compound issues generated in otheractivities of an insurer. It therefore attracts a low but non-zero weight. At the otherend of the spectrum non-insurance financial business attracts a risk weight of 100%,
which is reflective of the fact that non-insurance financial business is immediately
concerned with the payment system, credit intermediation and investment banking /capital markets and related activities, and that it should consequently be treated likebanking. Provided that the G-SIFI project is concerned with the identification of
global systemically important financial institutions, non-financial industrial activities
attract a zero weight.

A-4

The key metric retained to capture the relative importance of any given businesssegment is total assets broken down along the aforementioned segments. The sizeof an operation becomes ever more relevant as the business portfolio of insurancecompanies shifts from traditional insurance to non-insurance financial activities.

Page 24 of 25© IAIS

A-5

Only a few key metrics serve as a common yardstick when assessing the businessportfolio of insurance companies on a consistent basis. There are even fewer such
metrics when insurance groups and conglomerates are to be assessed in relation toeach other on a global basis and the metric ought to be as available, reliable andstable as possible. The IAIS settled for total assets after having explored othermetrics. Although partly available through segment reporting in annual reports total
revenues and break-downs therefore prove too volatile on a year-on-year basis andare tainted by netting effects; also, revenues may not necessarily be reflective of theeffective scale of the underlying business.

A-6

Total assets can be determined for all business activities in the portfolio of insurancecompanies, even though, today, the granularity of annual reports typically stops atsegment reporting. To be reflective of the full scale of non-insurance financial aswell as semi-traditional and non-traditional insurance business, the break-down of
total assets must be adjusted for off-balance-sheet positions including intra-group
commitments. Insurance-dominated groups and conglomerates do know well how
their total assets are allocated across their business portfolio. If not, they should not
be engaged in any operation other than traditional insurance business in the firstplace. Considering the Insurance and Financial Stability report and the IFS
assessment approach, the insurance industry should have a genuine interest inadvancing their reporting according to the requirements set out.

A-7

The sum of the various multiplications of assets of a given business segment by
their respective risk weight add up to a figure referred to as G-SII IFS-score. Thiscan be expressed formulaically as follows:
G-SII-IFS score =
1.
2.
3.
4.
5.

+
+
+
+

2.5% or 20%
12.5% or 50%
22.5% or 75%
100.0%
0.0%

x
x
x
x
x

ASSETS (TRADITIONAL)ASSETS (SEMI-TRADITIONAL)ASSETS (NON-TRADITIONAL)ASSETS (NON-INSURANCE-FINANCIAL)ASSETS (NON-INSURANCE-INDUSTRIAL)

A-8

In the IFS assessment approach insurance companies are ranked according to theresult of their G-SII IFS-score.

A-9

Both the indicator-based and the IFS assessment approach are consistent with theconcepts expressed in Insurance and Financial Stability. The supervisory judgment
and validation phase of the overall methodology aims at producing a more robust
assessment of the systemic importance of insurers, supporting the results of theindicator-based assessment approach with the segment based IFS assessment
approach. The IFS assessment approach does not use indicators as proxies ofsystemic importance that may potentially fail to cover certain risky activities, but
assesses each segment of business comprehensively on its own.

Page 25 of 25© IAIS