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IIF report calls for greater cross-sector coordination in regulatory reform

A new report by the Institute of International Finance (IIF) highlights the potential impact on the insurance industry of regulatory reforms in both banking and insurance. It calls for greater cross-sector coordination between the banking and insurance industries in developing regulatory reforms.

Profound changes are under way in the regulation of both banking and insurance. In this dynamic regulatory environment it is essential that banks and insurers are able to undertake their core tasks in supporting economic activity in ways which are consistent with financial stability.

The IIF report "The Implications of Financial Regulatory Reform for the Insurance Industry", is intended to assist policymakers in developing the durable and effective standards necessary for new regulation that supports Swiss+Re+Chairman+Walter+B.+Kielholzeconomic stability and growth.

In presenting the report, Swiss Re Chairman Walter B. Kielholz, IIF board member and chairman of the authoring IIF Insurance Working Group, said that "uncoordinated reforms will be less effective in promoting financial stability and will undermine the ability of insurers and banks to undertake their core functions in supporting economic activity and recovery".

Mr. Kielholz added, “At a time of important regulatory change, policy makers need to understand how the insurance and banking sectors will interact under the new regulatory regimes." He also stressed that "the long-term investment function of insurers in the real economy needs to be preserved through appropriate regulatory incentives.”

Key points raised by the report

The report, presented 17 August 2011, calls on policymakers to understand the full implications of regulatory reform and consider them when developing regulations. In particular, it draws attention to the incentives that the new insurance solvency rules and Basel III are likely to create, especially with respect to holdings of debt. The study highlights incentives provided to banks and insurers under these new regulations to place more emphasis on sovereign debt.

It also draws attention to the incentives potentially created by the upcoming European regime to shorten the maturity of insurers’ corporate bond holdings. This may run counter to the precepts of good risk management and asset/liability management principles by encouraging insurers to shorten the tenor of their asset portfolios while their cash-flow profiles remain generally long-term. 

Insurance and banking business models are different…

The IIF points out that a failure to understand the differences between insurance and banking and adequately coordinate the regulation currently underway in both sectors could lead policymakers to ignore potentially profound implications of changes across sectors. As a result, they could make unwarranted assumptions about how regulatory reform will operate in practice.

In examining the interactions between banking and insurance regulation, the report focuses particularly on the extent to which insurers are currently providers of capital and long-term funding to the real economy and banks - and how new insurance regulations could affect their future role. The study also points out some limitations on the extent to which insurers may be willing or able to respond to additional capital or funding needs of banks. 

…and regulation must take this into account

Banks and insurers operate with fundamentally different business models and run different kinds of risk. Regulations should reflect these differences. For example, changes in the regulatory treatment of different asset classes will inevitably have implications for insurers’ asset allocation decisions. This and other aspects of the reforms to banking and insurance regulation may have unintended consequences.

At the same time, however, changes in banking regulations can also have profound implications for insurers. This means that, while it would be inappropriate to seek to harmonize the regulations applied to the two sectors, it does clearly need to be coordinated much more than in the past.

Published 17 August 2011

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