Making our contribution to financial stability

Insurers’ core activities do not pose a systemic risk. This is the conclusion of a study launched by the Geneva Association, the international think tank and global CEO platform. It recommends that regulators and policymakers focus on risk activities and not on institutions when introducing new macro-prudential regimes.

The study analysed the role of insurance in financial stability and systemic risk, concluding that core insurance activities, namely managing capital, providing protection and transferring risks through reinsurance or capital markets, pose no systemic threat.

Core (re)insurance poses no systemic risk

Applying the Financial Stability Board’s (FSB) definition of systemic risk to these activities, complemented by the International Association of Insurance Supervisors (IAIS) considerations, the study found: their limited size means there would be no disruption to financial markets or the whole economy; that claims impacts are slow enough that insurers can absorb them over time; that the degree of interconnectedness between insurers means that the risk of contagion is also reduced; that the insurance market has a strong ability to rebuild capacity.

Some activities could be problematic

The report also found two non-core insurance activities which caused difficulties during the crisis and which could be a source of systemic risk if conducted on a massive scale, with inadequate risk management or insufficient regulatory oversight. These are derivatives trading on non-insurance balance sheets and mis-management of short-term funding from commercial papers or securities lending.

Fair representation for (re)insurers

The insurance industry does not object to being part of the systemic risk monitoring process but believes that insurance representatives should be fairly represented. Five recommendations for enhancing financial stability are mentioned in the report: these include implementing a principle-based group supervision and strengthening risk management for liquidity risk and for the industry as a whole.

For more information, visit the Geneva Association website or download the full report.

Published 26 March 2010

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