Staying on top of regulatory risk

Sensible regulation needs to incentivise institutional investors to think and act long-term.

To be sustainable, economic growth needs a consistent, clear and reliable regulatory framework. This applies to banking as well as insurance regulation.  Swiss Re experts highlight that since the global financial crisis, financial regulation has increased significantly1 . While the amount of financial regulation has surged in recent years, it has also become less transparent and complex. Even though the banking system is much better capitalised, it does not mean that more regulation is better for economic growth.

Regulatory risk – a change in laws or regulations that can increase the cost of conducting business or detract from the attractiveness of investments – has increased in recent years. This development has been accompanied by lower loan growth. For example, while the Basel III regulatory framework was introduced on a global level, national regulators added their own jurisdictional elements, further increasing the burden and complexity of the Basel III implementation.

Solvency II

The Solvency II Directive is an example of effective regulation of the insurance industry. It represents, among other things, a “maximum harmonisation” regulation intended to prevent national regulators from adding further country-specific rules and restrictions.

Long-term investors, such as insurance companies, should remain incentivised to think and act long-term. The Solvency II regime is definitely helpful in this regard. Given insures' long-dated liability structures, they have a natural interest in investing in infrastructure debt assets. Infrastructure projects usually have a very long time horizon, lower default rates and higher recovery rates than comparable corporate bonds, a fact confirmed by the European Union Financial Regulatory Institution's decision when capital charges on infrastructure debt in 2016 were lowered.

Notes
1. pages 18-21 of Growth Recipes: The need to strengthen private capital markets


Supporting financial resilience

Re/insurance supports financial resilience by acting as a shock absorber and promoting growth through its core businesses. This is particularly important in a challenging and volatile macro-economic environment.

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