As the world is heading towards global economic uncertainty, regulators have agreed on a new term to make sure the industry will continue to stay strong. Companies are required to hold more capital under this new terms to avoid taxpayer from bailing out in case of any crisis in the future.
According to Bloomberg, the latest announcement was made through a document released in Basel by the International Association of Insurance Supervisors. The move is considered as precautionary steps by some analyst as the fear of what happen in 2008 could be repeated where the government has to bail out the insurance sector.
All 9 major insurance companies are expected to increase the capital by 10 percent. However, for unregulated companies they could face an increase as high as 18.75 percent. Reuters reported that the insurance company involved includes AIG, MetLife, Aviva, Ping An Insurance, Generali, and Axa.
Insurance companies are required to announce their extra capital buffer until 2019 under the new rule. This will enable public to know the strength of the company that they are applying for a policy.
However, the proposed requirement is expected to be projected in phases from 2016 to 2019. The new requirement will see companies' capital increase about 75 percent higher than the previous national requirement according to Channel News Asia.
There will be two phase under the new requirement that will be conducted by IAIS the first phase is known as the capital cushion for basic capital requirement while the second phase is known as higher loss absorbency.
However, the new regulation is not agreed by everyone as Still CEO, Steve Kandarsian said that the excessive regulation could lead to higher policy price for the end user.
He also argues that the rule should be applied only to the banking system as the regulation is deemed too strict for insurance.
On the other hand, AIG spokesperson believes that the increment is necessary for the industry as witnessed during 2008 financial collapsed. He also said that companies should not be worried as the 10 percent capital increase is the average expected increment, but it will depend on each individual company instead.
The IAIS is an independent organization that regulates insurance companies around the world. The organization which is established in 1994 is also a member of the Financial Stability Board and responsible for helping to regulate the finance in the insurance sector. Other companies are unavailable for comment as for now.
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