Global insurers should be supervised at scale

As Warren Buffett hosted the jolly 50th anniversary shareholder meeting of Berkshire Hathaway in Omaha, Nebraska, this weekend, tensions were rising over whether his company could imperil the world's financial system. They are part of a tussle between US states, the federal government and global regulators over who should watch over the world's largest insurers.

The tensions have surfaced on both sides of the Atlantic, with Republicans in Washington protesting over the influence of the Financial Stability Board in Basel, and the Bank of England writing to the Federal Reserve to question Berkshire's status. They are bound to grow as MetLife, the largest US life insurer, mounts a challenge to being designated as "too big to fail".

Some of this reflects a turf war. Insurance regulation is highly fragmented, with state insurance commissions traditionally supervising even large US insurers, rather than federal regulators such as the Federal Reserve. Both US insurers and their regulators want this to continue, and resent what they perceive as a power grab by Washington, encouraged from Basel.

Much of it stems from the pivotal role of American International Group in the 2008 financial crisis. AIG, supervised by the defunct Office of Thrift Supervision and local insurance regulators, was belatedly found to have an insolvent derivatives trading unit, heavily intertwined with large banks and investment banks. Regulators and governments vowed that this should never happen again.

It led to twin efforts to toughen supervision of non-bank financial institutions such as insurers. The first initiative is by the FSB to identify insurers whose collapse could imperil global financial stability. The second is by the US Financial Stability Oversight Council - a grand committee of regulators set up after the 2008 crisis - to pinpoint the most risky US insurers and to subject them to federal oversight.

Each has come up with a list of "too big to fail insurers" on which AIG, Prudential Financial and MetLife appear. The FSB may add to its list reinsurers such as Munich Re, Swiss Re and Berkshire Hathaway, whose reinsurance operations include General Re. US regulators have not yet listed Berkshire, partly because it is such a large industrial enterprise that it may not qualify as a non-bank financial institution - it could be too big to be designated.

State regulators are correct that insurers tend to be less fragile than banks because depositors cannot withdraw their money at will. In a crisis, insurers tend to have the luxury of time to run off their assets and liabilities. They are also right - as AIG showed - that good supervision means more than transforming insurers into financial fortresses with additional capital and liquidity rules.

But the principle of consolidated supervision of large insurers is sound. MetLife operates in 50 countries through 359 subsidiaries and holds 25 per cent of its assets overseas, mostly in Asia. State regulators are effective in handling insurers with limited operations in a few states, but they can be overstretched by scale and scope. Group oversight makes as much sense for big entities in the US as it does for those in Asia and Europe.

It is also vital for global reinsurers to be treated equally and to be covered by one framework. It would be absurd for one of the world's largest reinsurers to receive a pass simply because its founder is revered as an investor and his company is so big that it can hold a sizeable reinsurer within it. Turf wars between Nebraska and Basel can hopefully be avoided, but if it comes to that, consistency should prevail.

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