Re/insurance and 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.

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.

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.

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.

Stefan Lippe, CEO of Swiss Re, launched the report in London on 25 February 2010 together with other Geneva Association members Nikolaus von Bomhard, CEO of Munich Re, and Andrew Moss, CEO of Aviva. The report was also presented at the International Association of Insurance Supervisors’(IAIS) Technical Committee hearing in Basel where Raj Singh, Swiss Re’s Chief Risk Officer, participated in a presentation.

“Global and large insurers and reinsurers play an important role in supporting the global economy,”said Stefan Lippe. “They are shock absorbers and have the capacity to adopt investment strategies with long-term horizons. That is why we should be considered part of the solution to financial stability.”

Raj Singh said: “The insurance industry weathered the financial crisis and was not the source of its making. This report represents a constructive contribution to the debate on systemic risk and we look forward to further dialogue with the insurance industry supervisors on this matter.”

Published 24 March 2010

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