Getting the macro dimension right

(Re)insurance and its role in the recent financial crisis was one of the central issues debated by industry leaders at the annual meeting of the Geneva Association, co-hosted by Swiss Re Chief Executive Stefan Lippe. Systemic risk, the modernisation of regulations affecting the sector and the impact of the insurance industry globally were also in focus at the event. Held at the Swiss Re Centre for Global Dialogue, the meeting was attended by 55 of the Association’s 80 members, as well as 40 other key stakeholders of the insurance industry.

In the wake of the financial crisis, the financial services industry has been subject to scrutiny as lawmakers work to develop mechanisms that aim to prevent a repetition of the conditions that led to the recent turmoil. Their focus has been on the notion of systemic risk, or the perception that an organisation is subject to a significant risk of contagion due to the proliferation of linkages between it and other organisations.

Banking and insurance two different animals

Swiss Re has been a leader in the discussion on systemic risks in the (re)insurance industry, contributing to the Geneva Association’s recent report on the issue, which highlighted the differences between the banking and insurance industries as well as underscoring that the core business of (re)insurance does not represent a systemic risk. The report argued that a focus on specific institutions when assessing systemic risk was unlikely to manage the risks more effectively. Instead, attention should be turned to risk activities and not to individual companies.

The increasing alignment of regulatory regimes was another important issue: as Europe prepares for the implementation of the Solvency II regime in 2013, there is a great deal of debate around the benefits of economic, all-risks regulatory regimes. From the perspective of the (re)insurance industry, the convergence of reinsurance regulatory standards globally would be an appropriate and true reflection of the worldwide nature of our business.

The longevity challenge

Beyond the regulatory issues, the event also presented an opportunity to discuss many of the long-term risk trends that shape the landscape in which insurers and reinsurers operate. Longevity was one of the central themes, in particular in terms of the risk that this poses to pension fund providers as well as to future pensioners who are inadequately prepared financially for a longer-than-expected retirement.

Elevated levels of government indebtedness and the volatility in stock portfolios brought about by the financial crisis have exacerbated the issue of retirement funding. Insurance solutions are already used to help manage inflation and interest rate risk, but private and public pension providers could also benefit from innovative products like longevity swaps where a (re)insurer assumes the risk of higher-than-expected future claims in exchange for a fixed premium. Such solutions and others like them show the value that (re)insurance can generate for society.

The Geneva Association event was co-hosted by Swiss Re, Zurich Financial Services, Baloise and Swiss Life.

Published 22 June 2010

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