Reacting to the Financial Stability Board’s identification of nine global systemically important insurers, Fitch Ratings sees only a “modest improvement” in the insurers’ credit profiles, with higher capital and risk management standards offsetting competitive disadvantages.

In addition, Fitch predicts that the competitive issues will spur some of the insurers to lobby against their G-SII titles.

“We believe that the relatively low number of firms that have been included means insurers are more likely to try and get themselves removed from the list as they are more likely to see it as a competitive disadvantage,” the rating agency wrote in an announcement published yesterday.

Fitch adds that insurers that aren’t included on the G-SII list will not necessarily avoid additional capital requirements, noting that many are likely to end up included on individual countries’ lists of systemically important firms, which may largely mirror the G-SII standards.

The insurers named as G-SIIs are:

• Allianz SE
• American International Group, Inc.
• Assicurazioni Generali S.p.A.
• Aviva plc
• Axa S.A.
• MetLife, Inc.
• Ping An Insurance (Group) Company of China, Ltd.
• Prudential Financial, Inc.
• Prudential plc

From a credit ratings perspective, Fitch says these insurers’ ratings are already high, with little room to improve. The benefit could be diminished if the extra capital they have to hold for specific products makes them less competitive and damages their market position, Fitch adds.

“These firms’ ratings are already supported by strong capital levels and ratings are more likely to be limited by earnings power and market position than by capital adequacy. However, some insurers do have high debt leverage, which could be reduced by any additional capital they may have to hold,” Fitch’s announcement says.

Fitch added that the FSB decision to apply extra capital requirements only to non-traditional insurance business indicates a focus on risk, rather than just size—an approach that is in line with Fitch’s underlying ratings.

The firm also notes that the requirement that G-SIIs create a recovery and resolution plan, which in turn implies governments are less likely to bail out insurers in the future, does not affect Fitch’s ratings. Fitch’s ratings do not factor in any potential government support.

The decision to apply extra capital requirements only to non-traditional business also limits the impact of the designation on G-SII balance sheets because few large insurers underwrite credit default protection products anymore.

Fitch reports that the requirements for G-SIIs will be introduced over a long timeframe, with the additional capital requirements on non-traditional business not likely to come into force until 2019.

“This adds to the uncertainty about the final impact as it gives insurers time to either lobby for further changes or to restructure or sell businesses in order to be removed from the list or limit the additional capital requirements,” Fitch concludes.

Source: Fitch Ratings