Democracy Gone Astray

Democracy, being a human construct, needs to be thought of as directionality rather than an object. As such, to understand it requires not so much a description of existing structures and/or other related phenomena but a declaration of intentionality.
This blog aims at creating labeled lists of published infringements of such intentionality, of points in time where democracy strays from its intended directionality. In addition to outright infringements, this blog also collects important contemporary information and/or discussions that impact our socio-political landscape.

All the posts here were published in the electronic media – main-stream as well as fringe, and maintain links to the original texts.

[NOTE: Due to changes I haven't caught on time in the blogging software, all of the 'Original Article' links were nullified between September 11, 2012 and December 11, 2012. My apologies.]

Tuesday, October 09, 2012

As regulators size up insurers, ‘too big to fail’ ignites debate

When it comes to lobbying policy makers and regulators, banks and insurance companies often line up together. But for the next while, don’t be surprised if insurers put some distance between themselves and their financial industry cousins. The reason: the Financial Stability Board, led by Bank of Canada Governor Mark Carney.

Mr. Carney’s group, which enacts the regulatory will of the Group of 20 nations, is turning its gaze in the direction of the insurance industry.

Last year, the FSB drew up a list of global banks whose size threatened the financial system, subjecting those firms to stricter scrutiny and higher capital demands. The FSB is nearing decisions on tighter scrutiny of the biggest hedge funds and private equity firms, and banks that are deemed “too big to fail” within the context of individual economies. By April next year, the FSB has promised to set new standards for global systemically important insurers, or G-SIIs.

The insurance industries in the United States and Canada hardly are enamoured with the prospect.

“The business of insurance is not systemically risky,” David Sampson, president of the Property Casualty Insurers Association of America, told reporters Thursday on a conference call. Mr. Sampson described the international approach to financial regulation as “bank-centric,” and expressed concern that insurance companies could get caught in a regulatory sweep simply because they’re big.

Mr. Sampson’s media push was timed to get his message out ahead of a gathering of international insurance authorities in Washington next week. The International Association of Insurance Supervisors, or IAIS, is doing the grunt work for the FSB, drawing up the criteria that will be used to determine whether an insurance company is a G-SII.

“Regulators must recognize that life insurance companies are different than banks,” Dean Conner, chief executive of Canada’s Sun Life Financial Inc., said in a speech in Toronto this week. “The unique aspects of the insurance business model enabled most insurers to withstand the financial crisis of 2008-09 better than other financial institutions. Traditional insurance businesses are not systemically risky.”

The G20’s obsession with “too big to fail” is a product of the financial crisis, when several governments had to rescue financial behemoths, including the insurer AIG. The regulatory agenda was launched with relative haste. There was a widespread feeling among officials that the window for rewriting financial rules would close quickly, so they flooded the zone, pledging to clean up most every corner of the global financial industry.

“Too big to fail” has been a particular flashpoint. The G20’s goal is to create a regulatory regime that will discourage financial institutions from becoming so large. The counterargument is that authorities are only telegraphing for financial markets the financial institutions that would be saved by taxpayers in a crisis.

So sensitive is the issue that Mitt Romney, the Republican nominee for president, sought to use it to gain leverage against President Barack Obama in this week’s presidential debate. The Dodd-Frank regulatory overhaul “designates a number of banks as ‘too big to fail,’ and they’re effectively guaranteed by the federal government,” Mr. Romney said. “This is the biggest kiss that’s been given to New York banks I’ve ever seen. This is an enormous boon for them.”

Insurers don’t see it that way.

If you want to animate an insurance lobbyist, mention AIG, whose failure and bailout during the financial crisis is perhaps the biggest reason international regulators feel compelled to subject the industry’s biggest players to special scrutiny.

Mr. Sampson and his lieutenant in charge of policy and research, Robert Gordon, sought to draw a red line between AIG and most of the rest of the insurance industry. They made the point that AIG’s insurance business was sound; it was the company’s decision to go crazy on exotic credit default swaps that brought the financial system to its knees.

The Canadian Life and Health Insurance Association made a similar point in a submission to the IAIS earlier this year. “It is only the non-insurance risks (most notably AIG’s) that created financial stress,” wrote Steven Easson, the association’s vice-president and chief actuary.

The main argument that insurance is different than banking is that insurers take fewer risks. Ahead of the financial crisis, U.S. property and casualty insurers had a leverage ratio of three to one, compared with 12 to one for commercial banks and 25 to one for investment banks.

Insurers say they aren’t systemically important because the collapse of an insurance company isn’t “pro-cyclical.” (When a bank goes bust, it hurts the economy because it stops lending. The harm from an insurance bankruptcy is more isolated.) There also tend not to be runs on insurance companies. “The vast majority of our products are illiquid,” said Sun Life’s Mr. Connor. “People do not die en masse in order to give their beneficiaries access to funds.”

Both Mr. Sampson and Mr. Connor say they sense that regulators are sympathetic to the insurance industry’s case against “too big to fail.” But the test could be the politicians, especially those who lived through the financial crisis. They have invested a great deal of credibility in promising citizens that they never again will have to bail out big financial institutions.

The risk for the insurance industry is that when voters and their political representatives look at a company like Sun Life, they continue to see AIG.

Original Article
Source: the globe and mail
Author: KEVIN CARMICHAEL

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