G20 regulatory reform agenda: it's time to level out the playing field

The G20 Antalya Summit in November is going to represent a significant step toward the completion of the global regulatory reform agenda. At an Institute of International Finance (IIF) panel discussion during the World Bank and International Monetary Fund (IMF) Annual Meetings from 9-11 October in Lima, financial business leaders and regulators discussed the progress made so far and the remaining policy challenges.

It's been seven years since the onset of the global financial crisis – and yet, global growth remains uneven. Even though a lot has been achieved since the crisis to foster future economic prosperity and preserve financial stability, we need further policy development.

Speaking at an IIF panel discussion in Lima, Swiss Re's Group Chief Financial Officer David Cole shared his perspectives on the regulatory reforms in the insurance sector. In order to ensure a level playing field, it is key that the G20's Financial Stability Board (FSB) continues to recognise the specificities of different financial sectors, he said. "If regulation is not appropriately tailored to the insurance business model, it could potentially harm re/insurers and even global market stability, e.g. by incentivising convergence in asset allocation strategies".

Dealing with systemic risk

While it's widely accepted that re/insurers are neither a source nor an amplifier of systemic risk, the sector is exposed to systemic risk. Climate change, for example, can result in different insurers facing large payouts for the same set of risks. But for these type of disastrous events, reinsurance has a proven track-record of absorbing the impacts of by means of diversification, which also helps mitigate the consequences on the wider economy. "Looking beyond natural disasters", Cole said, "geopolitical, technological, demographical and financial risks – such as the low interest rate environment – can also play an important systemic role affecting insurers."   

David Cole accentuated that measures dealing with systemic risk must be well aligned and complement each other. Macro prudential risks should be addressed appropriately, i.e. by considering scenarios that allow to monitor the risks, analyzing the vulnerabilities, and creating transparency on the dependencies. This enables that the impact on the sector is mitigated.  Scarce resources must be efficiently and effectively devoted to increasing the overall stability and resilience of the insurance sector, the financial system, and the economy at large.

The value of internal models

David Cole argued that in his view "internal models are a key tool to ensuring that the industry offers cost effective products whilst remaining an efficient risk absorber for society." Internal models have a number of benefits: they make the risk profile of companies more transparent and are essential to assess the capital needs correctly. However, the tendency towards a mandatory and exclusive use of standardized models threatens the progress already made on internal models by re/insurers. "Internal models have a role to play in the responsible pricing of risk and allocation of capital cost since they are much better adapted to the specific risk landscape of a company. The diversification between risks can also be handled more appropriately," Cole said.

Laying the groundwork for infrastructure financing

One other area in need of policy upgrades is infrastructure financing – which is key for economic growth. The G20 has made significant progress in prioritising this topic over the past years, but policies now need to be put in place to create a tradable asset class. This would help to mitigate regulatory and political risk and attract much needed institutional funds to bridge the large infrastructure funding gap.

Getting this regulatory framework right will be crucial in ensuring the global financial sector's ability to support economic recovery now and growth in the future.

Published 21 October 2015

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Posted by Kevin E. Thomas on 28 Jan 2016

The comments with regard to climate issues and the global meltdown were stricking as it relates to enterprise value and future impact as well as value to the enterprise.

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