Global regulators agree new capital yardstick for insurers

By Huw Jones

LONDON, Oct 23 (Reuters) - Global regulators have written the first global capital rule for insurers, marking a key milestone in efforts since the 2007-09 financial crisis to reinforce supervision of the sector.

The aim is to make sure big insurers hold enough capital at all times to meet commitments to policyholders and withstand the ups and downs in markets.

While insurers did not play a central role in the crisis and U.S. insurer AIG's $182.3 billion bailout is considered an exception, the bruising experience for taxpayers in rescuing banks left regulators determined to tighten their grip on all parts of the financial system.

The International Association of Insurance Supervisors (IAIS) said on Thursday it had agreed a basic capital requirements (BCR) ratio for the nine big insurance firms deemed to be systemically important on a global scale.

This list of insurers, which includes Generali, Aviva (Other OTC: AIVAF - news) and Axa (Paris: FR0000120628 - news) , will be updated in November, though so far no reinsurers have been included.

The new benchmark is calculated by dividing total qualifying capital resources by required capital, as defined by the IAIS.

Insurers will have to report their BCR on a confidential basis to supervisors from 2015. It is equivalent to roughly 75 percent of the capital level insurers must currently hold.

The IAIS will then complete work by the end of 2015 on a requirement for the big nine to hold higher loss absorption (HLA) capacity, such as retained earnings.

From 2019 the systemic insurers must hold capital equivalent to no lower than the combination of the BCR and the HLA.

The final piece of IAIS's work is a risk-based group-wide insurance capital standard (ICS) in 2016 for so-called internationally active insurance groups to apply from 2019.

It will replace the BCR, meaning the big systemic insurers will have to comply with a combination of the ICS and HLA.

The European Union hopes its own new insurance capital rules known as Solvency II will be accepted as a substitute for the ICS to avoid duplication of compliance costs.

The new global rules mirror the Basel III measures introduced to make banks safer after several lenders had to be rescued by taxpayers in the 2007-09 financial crisis.

While Basel III does not come into full effect until 2019, banks have complied early due to pressure from markets to demonstrate their underlying health, and some insurers fear the same thing will happen to them with the new capital rules.

"We are not masters of potential market reaction but it's certainly not excluded that that can happen," IAIS Chairman Peter Braumueller told a news conference. (Editing by David Holmes)