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Life insurers expected to be majority of ‘too big to fail’ candidates

Regulators from the G20 countries will this month unveil a list of insurers deemed "too big to fail", which will face tighter regulation and capital surcharges to limit the economic fallout if they go bust.

Up to 10 primary insurers are expected to feature on the list, to be published by the G20's Financial Stability Board (FSB) on an unspecified date this month. The FSB will follow up next year with a list of "systemically important" reinsurers.

The FSB aims to ward off a repeat of the 2008 financial crisis by identifying banks and insurers that are critically important to the wider economy. These firms will then be prevented from taking excessive risks through a combination of closer regulatory scrutiny and higher capital charges.

In 2008, the collapse of Wall Street giant Lehman Brothers sent shockwaves through the global economy, while several banks and insurers, including US giant American International Group, required costly taxpayer bailouts.

Alongside 24 banks, six insurers - Axa, Aegon, Allianz, Aviva, Zurich and Swiss Re - were revealed to be under the FSB's consideration for too-big-to-fail status in November 2009.

PwC's global insurance regulatory leader Paul Clarke said major life insurers would be the more likely candidates for the first list due to their large size, and that the chosen names should cause no great surprise.

Last year, the International Association of Insurance Supervisors (IAIS), a body of national insurance regulators that has assisted during the selection process, said it had collected data from 48 insurers in 13 different countries including Axa, Allianz, Prudential Financial, Legal & General and MetLife.

For the IAIS, a key factor in determining whether an insurer is systemically important is its involvement in "non-traditional or non-insurance" activities, a category that includes insurance-linked securities, credit default swaps and synthetic investment portfolios.

Insurers with large non-traditional balance sheets are seen as more likely to be categorised as systemically important. It is expected that capital surcharges will be imposed only on this kind of business.

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