Leading Insurers Call for Careful Consideration of Unintended Consequences Emerging from IAIS Proposals on Systemic Risk
|Targeted News Service|
The debate on systemic risk regulation in insurance is at a critical point.
Insurance plays a vital role in society. It brings benefits such as the pooling of risk, the provision of transparent pricing to a wide range of risks, offers financial protection for individuals, and bolsters the resilience of businesses and governments. "It is therefore essential to develop a regulatory framework that is properly tailored to the insurance business model, one that takes full account of its intrinsic characteristics and does not threaten to undermine its social and economic benefits," said Mr.
The IAIS acknowledges that there is little evidence of traditional insurance and reinsurance either generating or amplifying systemic risk within the financial system or the real economy. This view is shared by the IIF, and should be clearly reflected in the IAIS G-SII methodology and policy measures. Traditional insurance groups provide important benefits to the economy - as shock absorbers and long-term investors - but they are not sources of financial turbulence. Consequently, regulators should focus their attention on non-traditional and non-insurance activities which might be potentially systemically risky, in order to address systemic risk concerns. Only insurance groups that engage significantly in such activities without proper prudential oversight and adequate risk governance may become vulnerable to financial market developments, and therefore might be considered to potentially pose systemic risk.
The IIF is particularly concerned over the potential introduction of blanket capital requirements. In insurance, capital requirements must not punish size or global activity, as that would be a disincentive for effective risk pooling. Increasing the size and global activity of an insurer permits the pooling of risk, thereby contributing to greater financial stability and welfare. A blanket capital surcharge on large global insurers would reduce the efficiency of risk pooling and lead to more expensive insurance, less risk capacity and, ultimately, greater reliance on state protection.
The IAIS also proposes targeted capital increases on separated activities that have the potential to generate or aggravate systemic risk. The IIF encourages the IAIS to regard separation and targeted capital surcharges as measures of last resort, only to be considered after a specific assessment and identification of systemic relevant activities, and only after taking into account risk mitigation activities. Most non-traditional and non-insurance activities are closely linked to traditional insurance and complement each other without being systemically risky. A separation may eliminate the benefits resulting from such diversification.
Regarding the proposed measures for a potential recovery and resolution of a G-SII, it is vital to recognize that characteristics such as maturity mismatches, illiquid assets and leverage, which can result in precipitate failure with systemic consequences, are not features of traditional insurance. It is intrinsically part of the nature of the insurance business that it permits a prolonged time to react to developing stress situations. A more tailored approach regarding recovery and resolution measures is therefore necessary for insurance.
The IIF believes that comprehensive group supervision for global insurance groups should be the primary measure to address potential systemic risk in insurance. Such an approach should allow supervisors to monitor all group-wide activities on a consolidated basis, with particular focus on non-traditional and non-insurance activities, and to detect and adequately mitigate any potentially systemic relevant activities. Group supervision should therefore play a major role in any potential set of G-SII policy measures.
TNS MD66 121218-4144024 61MariaDonald
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