Swiss Re CEO Stefan Lippe talks on systemic financial risk

Since the financial crisis began in the US housing market in the summer of 2007, the balance of financial power has shifted dramatically. Regulatory and consumer trust in the financial services industry has been shaken and governments around the world are reclaiming regulatory authority. Several approaches to regulating and monitoring systemic financial risk are emerging, but the question remains whether these measures are appropriate for all players?

The current proposals from regulators are generally aimed at addressing the issue of financial institutions that are too big or too interconnected to fail. Proposals also exist for the introduction of conservative capital buffers.

However, these measures would not be appropriate for insurers and reinsurers, said Swiss Re’s Chief Executive Officer Stefan Lippe at a World Economic Forum event in Davos.

“Insurers are not banks,” Lippe said at a panel discussion on “Rethinking Systemic Financial Risk”. “The issue of too-big-to-fail, for instance, is not a problem for insurance and reinsurance companies where bigger is generally better in terms of being able to diversify risks.”

Their size allows major global insurers and reinsurers to play a crucial role in the global economy as shock absorbers, enabling the risk taking that is essential for growth by pooling and diversifying risks. Lippe added on the question of capital: “We don’t need more capital, we need risk-based capital.”

Focusing on one part of the puzzle is also not an appropriate approach to managing systemic risk, says Swiss Re’s Chief Risk Officer Raj Singh, who is also participating in regulatory discussions at the WEF. “Systemic risk oversight needs to be more broadly-based, considering not just large companies, but also markets, products and risks,” Singh said. “As a reinsurer, we are used to developing such broad perspectives as this on risks.”

In order to tackle potential systemic risks in the (re)insurance industry itself there are already several measures under development. In Europe, the new Solvency II framework that will come into effect in 2012 is a true, risk-based and economic regime that contains many of the key elements that regulators now propose: this includes a requirement for stress tests, greater transparency and providing more flexibility for supervisors to intervene. In the US, the move towards a Federal regulator is an important step forward and a recognition that supervision needs to progress beyond a local or regional perspective.

Published 23 March 2010

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