The Need for Global Insurance Regulation

What are Collateralised Debt Obligations?

These are the structured finance vehicles whose collateral is traditionally made up of a number of individual loans, such as:

• Mortgage
• Credit card loans
• Corporate debt

In the run-up to the global financial crisis, banks released several hundred billion dollars of CDOs.

What are Credit Default Swaps?

A form of credit insurance which transfers the default risk of a financial instrument from the buyer to the seller.

How did the American Insurance Group (AIG) collapse?

AIG became a major seller of credit protection in the value of more than $500bn. Nearly $60bn of the CDOs on which AIG had sold credit protection contained mortgage-backed securities, many of which referenced subprime mortgages, which significantly declined in value as the US housing market turned in 2007. The collapse in CDO values and CDO rating downgrades required AIG to post additional cash collateral with its CDS counterparties. This collateral requirement created a liquidity crunch, which was compounded by AIG’s inability to access capital markets. The results of these events eventually led to AIG’s bankruptcy.

Why did Aegon require a bailout?

Aegon is one of the largest providers of life insurance, pensions and asset management operating across the world. In the US they are known as Transamerica. 

• They incurred a direct 350 million euro loss due to its exposure to Lehman Brothers and Washington Mutual
• It was forced to mark losses against other financial portfolios
• Aegon became subject to a significant increase in its own CDS spread. From 140 bps at the beginning of September 2008 to more than 500 bps by mid-October

What is a Financial Stability Board and its key objectives?

The Financial Stability Board or FSB established in April 2009 in response to the Global Financial Crisis is one of the key international bodies that monitors and makes recommendations about the global financial system by coordinating national financial authorities and international standard-setting bodies.

The FSBs objectives can be broken down into the following areas:

• Assess the vulnerabilities affecting the global financial system
• Promote coordination among authorities responsible for financial stability
• Monitor and advise on market developments and their implications as well as meeting regulatory standards
• Undertake joint strategic reviews of the international standard-setting bodies, such as the IAIS and coordinate their respective work on policies