Eurofi 2012: the role of reinsurance in financial stability and long-term growth

The annual Eurofi financial forum 2012, organized in association with the Cyprus EU presidency, was held in Brussels at the end of September. It brought together senior representatives from public authorities and the financial industry to address long-term growth and stability challenges in the context of a new financial regulatory framework.

Discussions at Eurofi1 were timely, with the Financial Stability Board (FSB) and the International Association of Insurance Supervisors (IAIS) defining the methodology and indicators to identify possible global systemically important insurers (G-SIIs). Given the environment of bank deleveraging and scarcer sources of long-term financing, the impact of regulation on long-term oriented investors also received considerable attention.

Systemic risk debate

Philippe Brahin, Head Governmental Affairs, participated in the panel discussion "Preserving the role of insurance companies in financial stability", chaired by Mario Nava (EU Commission) and including Yoshihiro Kawai (IAIS Secretary General) and Denis Duverne (Deputy CEO, AXA). In examining how to appropriately address systemic risk concerns, the panel discussed how structural differences amongst various financial players (eg banks and reinsurers) means they should not be subject to similar policy constraints.

In regards to reinsurers, Philippe noted that Swiss Re recognizes the importance of addressing systemic risk and agrees with the industry view and IAIS finding that the "global financial crisis provide(d) evidence that traditional insurance does not generate nor amplify risk". In addition, he mentioned the contradiction in the IAIS approach towards reinsurers: while the IAIS recognized that "reinsurance is part of traditional activities" and that "reinsurance is unlikely to generate nor amplify systemic risk", its May 2012 methodology uses reinsurance as a systemic risk indicator of interconnectedness. The concern is that international political debate dominated by banking-driven concerns could see a banking-paradigm focused on size and interconnectedness be applied to the re/insurance sector – despite the technical evidence2 that traditional re/insurance activities do not pose a systemic risk.

Addressing the policy measures for companies that will be named G-SIIs, Philippe underlined that potential policy measures should be tailored towards potential systemically risky activities and capital requirements (Higher Loss Absorption Capacity measures) should not apply across the entire balance sheets of groups. And, while Swiss Re agrees with the IAIS that the global nature of reinsurance and its innovative/alternative approach to solutions require on-going regulatory monitoring of the sector, it believes that reinsurance does not qualify for systemic risk designation.

Long-term financing and growth

Jérôme Haegeli, Head Investment Strategy (Asset Management), participated in the panel discussion "Improving the financing of long term projects to favour growth", chaired by Jacques de Larosière (Eurofi Chair) with introductory remarks by Franco Bassanini (Cassa Depositi e Prestiti) and Pervenche Bérès (Member European Parliament). During this session, participants discussed the main challenges for project financing over the longer horizon, namely upcoming changes in the regulatory landscape and the lack of a fully-fledged financial market architecture for long-term projects.

Given the high public debt, fiscal deficits and continued bank deleveraging, Jerome noted that it is very difficult, in the current regulatory environment, to see how the EUR 2trn investment needs in European infrastructure3 will be met for the next decade. While long-term investments in infrastructure are attractive, the regulatory environment is punitive: under the upcoming Solvency II framework a 20-year infrastructure investment will typically be subject to a capital charge of almost 30%. Consequently, the risk that upcoming regulatory changes will make long-term-oriented investors shortsighted is not small. This needs to be addressed to ensure that the reinsurance sector, like other long-term investors, continue to exercise a market stabilizing role and provide risk capital to the wider economy.

The panelists discussed how an ongoing environment of weak global growth, in the context of bank deleveraging, is leading to a "low yield for longer"-environment: In the current financial repression phase, the collateral damage created by "ultra-expansive" monetary policy settings around the world is very significant for the re/insurance sector (especially in life and health) but, more generally, it also exercises a heavy toll on savers and pensioners.

Given the current "low yield" environment, Jerome emphasized that long term investing in infrastructure projects is very compelling for the re/insurance sector; but a more accommodative regulatory framework is necessary to improve the investment appetite and bring it closer into sync with the pipeline of infrastructure needs.

1 Eurofi is a European think-thank chaired by Jacques de Larosière (former Governor of French Central Bank and Head of the IMF) that is dedicated to financial regulation and supervision and provides a platform for exchange of views between the industry and public authorities.

2 As discussed during the panel, important reports confirm the role of reinsurers as stabilizers and that reinsurance is neither a source nor an amplifier of systemic risk. These include the 2006 G30 report, a Geneva Association report from 2010, and the 2012 IAIS report on financial stability and reinsurance.

3 On infrastructure investments, the OECD provides good background on future needs, see "Infrastructure to 2030),

Published 12 December 2012

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