Swiss Re CEO Stefan Lippe explains industry position on systemic risk at Eurofi G20 seminar

The recent financial crisis highlighted the need for systemic risk monitoring. It showed that some financial institutions were so interconnected with other financial companies that they posed a risk to the entire financial system.

A current topic of debate is how to design an adequate regulatory framework for systemically important financial institutions (SIFIs). However, can one framework cater for the whole financial sector?  And are the criteria used to define SIFIs suitable to (re)insurance?

Swiss Re's position was made clear by CEO Stefan Lippe at the recent Eurofi G20 High Level Seminar in Paris on 18 February: “SIFIs do not exist in the context of insurance and reinsurance”, he said. Indeed, the (re)insurance industry is arguing that, instead of concentrating on “size”, the supervisory focus should rather be on risk activities and not institutions.

The current approach to SIFIs focuses on individual institutions, identifying companies based on their asset-size or market share. However, this “too big” or “too interconnected” to fail approach should not apply equally to (re)insurance and banking because it disregards the differences in business models in banking and insurance. “Size” – in other words diversification – is actually a key element in the value proposition of insurers and reinsurers. In fact, diversification across different countries, lines of business and unrelated hazards allows global (re)insurers to act like “shock absorbers” – smoothing the impact of costly events and injecting capital into the real economy. This allows global (re)insurers to remove risk from the system, as opposed to being a source of risk.

Many of the problems during the crisis arose from the banking sector. “There is low interconnectedness with the underlying insurance industry, which cannot be compared with the inter-banking market”, Lippe said. He added, “because it doesn’t have a bank’s immediate liquidity calls, an insurer has time to leave the market in an orderly way, disposing of liabilities and assets over years.” Therefore, insurers and reinsurers should not be subject to the same systemic risk supervision as banks.

The (re)insurance sector has a fundamentally different business model compared with the banking sector. With the exception of a few individual insurance companies – whose problems arose in areas related to financial products and not insurance activities – the industry weathered the financial crisis well. No diversified reinsurer failed during the crisis and reinsurance was one of the few sources of capacity available during this time. A Geneva Association market study on "Systemic Risk in Insurance", released in March 2010, concluded that the core insurance and reinsurance risk activities pose no systematic risk.

“Concentrating only on institutions creates openings for risk migration, underestimation of systemic risk, market distortions and moral hazard”, said Stefan Lippe at the Eurofi G20 High Level Seminar. In the case of (re)insurers, imposing a SIFI framework will reduce the risk capacity of the industry, endangering its role as risk-absorber and provider of long-term financing to the real economy.

The Eurofi G20 seminar brought together over 200 senior public officials and CEOs from global financial institutions in Paris on the occasion of the G20 Ministerial meeting. Personalities such as Mario Draghi (Chairman of the FSB), Dominique Strauss-Kahn (Managing Director, IMF), Jean-Claude Trichet (ECB President) and Philipp Hildebrand (Chairman of SNB) participated in the Eurofi G20 seminar.

Published 28 February 2011

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