FSB updates guide for critical insurer function identification

The Financial Stability Board's revised practices paper details approaches used by four member jurisdictions—Australia, China, France, and the Netherlands—for identifying critical functions of insurers.

This identification is a crucial first step in resolution planning, aiming to ensure orderly resolution without taxpayer exposure and maintain continuity of vital economic functions.

The paper describes commonalities and differences in background, scope, methodology, and review processes across these jurisdictions.

All four apply the three core elements of FSB guidance: assessing impact on financial stability and the real economy, evaluating substitutability, and conducting insurer-specific assessments.

However, the sequence and context of these steps vary, with examples such as China's self-assessment validated by authorities, the Netherlands' public interest test, and France's identification of inherently critical functions.

The paper incorporates a revised definition of a critical function for insurers, now comprising three key elements.

A function is critical if it is provided to unaffiliated third parties, its sudden failure would materially impact the financial system or real economy, and it cannot be substituted within a reasonable period or cost.

The case studies primarily identify critical functions related to insurance payments vital for individuals' financial security or as a precondition for daily life and economic activity.

Functions concerning investment or derivatives markets appear less relevant, except for China.

This broad interpretation considers the economic and social role of insurers.