A newly released initial list that designates nine of the world’s biggest insurance companies as hazardous to the global financial system used flawed methodology, according to representatives of the insurance industry.
The ranking was compiled by the Financial Stability Board (FSB), an international entity that monitors the global financial system and makes recommendations about how to avoid a collapse.
The companies deemed to be a threat, or systemically important, include AIG, MetLife and Prudential Financial in the U.S. as well as five European firms and one Chinese insurer.
The FSB says all of these companies need to meet a host of conditions, including higher capital requirements.
However, the Global Federation of Insurance Associations (GFIA), a non-profit body that represents insurance companies around the world, contests the methodology of the FSB ranking.
The GFIA says the list ended up deeming these specific insurance companies risky not so much for the threat they pose, but rather because they’re big, “which is not a risk factor in insurance.”
The GFIA also says that the FSB study should have taken the specific characteristics of the insurance business model into greater account.
“The GFIA is extremely disappointed that there has not been greater adaptation of the work done to address systemic risk in banking to create the measures and the methodology for the insurance sector,” explains Frank Swedlove, chair of the GFIA.
“The nature of the assets and liabilities of insurers is very different from that of banks,” Swedlove adds. “Any methodology and potential measures to be applied to insurance companies should reflect this reality to a larger extent than has so far been the case.”
The requirements imposed on insurers considered to be systemically hazardous have to promote continued risk diversification, according to the GFIA.