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Are SIFI Insurers in for Trouble with Sterner Capital Rules?

Insurers under the Systematically Important Financial Institution (SIFI) banner will face sterner capital requirements as per the new standard chalke out by the International Association of Insurance Supervisors (IAIS).

These insurers are, namely, American International Group, Inc. AIG and MetLife, Inc. MET , Prudential plc PUK of UK, with a Zacks Rank #3 (Hold), and Prudential Financial, Inc. PRU with a Zacks Rank #2 (Buy), Britain's Aviva plc AV , Ping An Insurance of China, Italy's Generali, GE and Axa of France. The companies have attracted a SIFI status because of their strong links with the global financial markets. As a result, their collapse can create quite a tumult in the global markets.

The Set Standards

The SIFI designation calls for stringent oversight on the company by the Federal Reserve. This will be followed by stressful capital compliance, whereby the designated companies will have to increase their capital-adequacy levels to guard against potential losses and contingencies.

Additionally, the SIFI tag requires regular financial scrutiny and an eventual government-monitoring, which will also restrict the utilization of borrowed funds. Overall, such restrictive capital policies may impede the successful completion of the previously targeted share repurchases.

The government's decision to rope in big non-banking financial organizations in the U.S. stems from the reforms initiated to evade financial crises like the one witnessed during 2008. Consequently, at the request of the Group of 20 economies (G20), IAIS has completed a two-part capital requirement for these players.

These insurers have time until 2019 to build their capital buffer. The finalized detailed rules will be made available by the G20 leaders next month at a summit in Turkey.

Per the new standards, these players will have to keep in buffer capital in excess to what has been maintained by them till now. While on average the increase would be 10%, it can go as high as 18.75% in case of unregulated banking activities which carry greater risk. However, for companies selling safer traditional insurance products, the increase in capital would be 6%.

For the non-traditional insurance selling policies tied to mortgages and variable annuities, which are exposed to the volatility in the equity markets, the capital standard would be at least 12% higher than the basic capital requirements for 2015.

Pros & Cons

While a strong regulatory oversight will strengthen the safety and security of the financial system, it will prove to be a near-term hurdle for the insurers who already face strict capital rules from the states and credit rating agencies. Additional and more stringent capital compliance fill not only impede capital deployment by these companies but will also tighten their operational and financial flexibility, resulting in additional compliance costs, which would ultimately be a burden on lower-income consumers through higher product pricing.

Overall, this can distort these companies' business model as well as their competitive and capital leverage, to a certain extent, ultimately weighing on the financials.

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AMER INTL GRP (AIG): Free Stock Analysis Report

METLIFE INC (MET): Free Stock Analysis Report

PRUDENTIAL PLC (PUK): Free Stock Analysis Report

PRUDENTIAL FINL (PRU): Free Stock Analysis Report

AVIVA PLC-ADR (AV): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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