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Financial stability and reinsurance

Swiss Re Chief Economist Kurt Karl discusses financial stability in reinsurance at the 6th Annual NAIC International Insurance Forum.

"The reinsurance business is by definition interconnected and it provides important benefits to the insurance sector and the real economy, but it is not systemically risky by nature." These comments were made by Swiss Re Chief Economist Kurt Karl at the recent National Association of Insurance Commissioners (NAIC) forum in Washington. The event is designed to address the impact of international supervisory developments on the US supervisory framework.

Speaking before an audience of more than 200 industry leaders and regulators, Karl participated in a panel discussion on financial stability policy measures emanating from the global financial crisis, specifically the likely impact that designation of Global Systemically Important Insurers (G-SIIs) will have on the insurance sector. The first list of G-SIIs is expected to be announced in mid-2013, despite a number of supervisors concluding that traditional re/insurance activities are unlikely to be a source or amplifier of systemic risk, including the International Association of Insurance Supervisors (IAIS), which is developing the identification methodology and policy measures for G-SIIs.

Highlighting NTNIA and HLA

Karl addressed the issues which remain controversial and critical in the debate on policy measures, namely the treatment of non-traditional and non-insurance activities (NTNIA) and the application of higher loss absorbency (HLA) measures. "The best way to manage non-traditional activities is through effective Group supervision, much of which is already in place, as well as through the supervision of non-insurance, non-traditional products. We think that focusing the requirements for HLA capacity on products makes sense and is a much better approach than overall capital charge on the designated G-SIIs."

Potential consequences remain unclear

He also reiterated industry concerns that a full impact assessment regarding the designation of G-SIIs has not been carried out and the potential consequences on both the insurance and overall financial sector remain unclear. "Other upcoming regulatory reforms, such as Solvency II, have had extensive quantitative impact assessments, but no such assessment has been carried out to determine the impact of G-SII designation. The G-SII regulation is being developed in conjunction with many other reforms across the financial sector – it is crucial that the cumulative and cross-sectoral impacts are considered, especially when there is a global initiative underway to foster convergence and achieve recognition of group supervisory regimes via the proposed IAIS ComFrame."

Insurance industry engaged

Other panelists included UK PRA Deputy Head and Executive Director for Policy Paul Sharma, IAIS Secretary General Yoshi Kawai, former NAIC CEO Dr Terri Vaughan, and GenRe General Counsel Damon Volke. The panel was moderated by John Huff, Missouri Insurance Director and the NAIC representative to Financial Stability Oversight Council. As many policy measures regarding G-SII designation remain undecided, the industry will remain engaged with this issue for some time yet. Swiss Re welcomes steps towards improving stability within the financial sector and has been engaged in this debate since the beginning in order to underline the specificity of insurance and avoid the designation of re/insurance companies for the wrong reasons.  

Published 7 June 2013

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