OREANDA-NEWS. A consultation on capital requirements for global systemically important insurers (G-SIIs) reinforces Fitch Ratings' view that the eventual rules could lead to significant variation in capital requirements depending on the scale of firms' non-traditional insurance and non-insurance operations. But the average 20% increase in minimum capital proposed by the International Association of Insurance Supervisors (IAIS) is unlikely to result in any G-SIIs needing to raise additional capital.

The IAIS paper seeks feedback on the Higher Loss Absorbency (HLA), an extra buffer the nine G-SIIs will have to hold on top of the basic capital requirement once the rules come into force in 2019. The consultation suggests capital requirements could be around 20% higher as a result of G-SII status.

But the consultation also includes options for making HLA sensitive to a firm's volumes of non-traditional insurance business, such as variable annuities, meaning there could be significant variation around this 20% level. We believe Prudential Plc and AXA could therefore end up with a greater increase in capital requirements than most other G-SIIs, while Aviva and Generali are likely to be at the lower end of the range.

We believe most G-SIIs are already well capitalised and that despite these increased charges they will not need to strengthen capital to meet the new rules. Some could choose to increase capital if they want to keep the same buffer above the regulatory minimum.

Separately, the IAIS announced a new timetable, putting back the development of insurance capital standards (ICS) by around a year and slightly watering down the targets for comparability between different jurisdictions at each stage. ICS are intended to apply to internationally active insurance groups, of which we expect there to be around 50.

The IAIS's decision to extend its timetable reduces the potential for unintended consequences or key factors being overlooked. But the timetable is still tight and further delays are possible, judging by the numerous delays experienced in developing the European Solvency II regime.

The final impact of all these changes is unknown, but it is clear there will be increased costs associated with the increased regulatory burden and that in certain cases insurers will have higher minimum capital requirements.

All else being equal, higher capital requirements could be positive for ratings if they lead to companies holding higher capital resources. But large multinational insurance groups are generally already well capitalised and in the vast majority of cases capital is either commensurate with or higher than the final rating category assigned. As a result, increases in capital held are unlikely to have a big impact on ratings.