The Financial Stability Board designated Prudential Financial (PRU) as a G-SIFI (Global Systemically Important Financial Institution), along with its US insurance peers AIG (AIG) and MetLife (MET). Apart from insurers, several banks and non-banking financial companies included in the Financial Select Sector SPDR ETF (XLF) received the G-SIFI designation.
The G-SIFI designation was created to address the problem of “too-big-to-fail” financial institutions in the wake of the 2008 credit crisis, as well as to have a stable capital standard and supervisory framework. Insurers receive a G-SII (Global Systemically Important Insurer) designation. These insurers are under the regulatory oversight of the Federal Reserve’s Board of Governors.
The G-SII designation requires an insurer to follow several measures. Firstly, each G-SII must undertake recovery and resolution planning, allowing it to effectively manage crisis situations. Also, each G-SII must develop a systematic risk management plan and enhanced groupwide supervision.
A G-SII must also fulfill higher loss absorbency requirements for activities that are nontraditional and non-insurance in nature. Further, for such businesses, an insurer needs to maintain capital of the highest quality. This will increase the costs of the company in several ways.
For more information on capital regimes, please read An investor’s guide to the insurance business.
In the final article in this series, we’ll discuss how an investor can gain exposure to the insurance sector through ETFs such as the iShares US Financials ETF (IYF).