26 February 2010
Published in: Regulation - supervision
Insurance CEOs enter systemic risk debate
The world's largest (re)insurers today set out a 129-page argument on why insurance companies do not pose a systemic risk. The report published by the Geneva Association, a think tank representing the CEOs of 80 major (re)insurers, is a response to suggestions that insurers should be included in post-crisis regulation mostly aimed at banks.
The report used the criteria for systemic risk set out by the Financial Stability Board (FSB) - which is believed to have included six insurers on a list of systemically relevant jurisdictions -- to argue that insurers fit none of the criteria. It argued that:
- Insurers' limited size means that there would not be disruptive effects on the financial markets;
- An insurance insolvency develops slowly and can often be absorbed by capital raising or an orderly wind-down;
- The features of the inter-relationships of insurance activities mean that contagion risk would be limited.
At the launch of the report, Stefan Lippe, CEO of Swiss Re, stressed that regulation "should focus on activities rather than institutions." Regulators, he said, should ask, "Is the activity connected with the financial system, and what impact will it have?"
The banking system is recognized to pose a significant systemic risk, but the relevance of insurers is the subject of much debate [see IERM, regulation/supervision, 18 February, "Do insurers pose a systemic risk?"].
Since the crisis, some experts and regulatory groups have argued that certain institutions are "too big to fail" and therefore pose a systemic risk. But Dr Nikolaus von Bomhard, chairman of the association and CEO of Munich Re, dismissed this argument. "What is deplorable with this is that you move away from risk-based criteria. It puts us back into a stone-age argument." Diversification, he said and the report argues, is more important to systemic relevance than size.
The report acknowledges that derivatives trading on non-insurance balance sheets and the mismanagement of short-term funding from commercial paper securities lending can, "when conducted on a widespread scale and without proper risk control frameworks" have the potential to cause systemic relevance. Bomhard said, however, that he believes Solvency II is more sophisticated than Basel II, and sufficiently addresses these issues.
The report concludes with five recommendations for regulatory oversight and financial stability:
- The implementation of a principles-based supervision framework for insurance groups in order to capture, among other things, non-insurance activities.
- Strengthening liquidity risk management.
- Enhancement of the regulation of financial guarantee insurance, which has a very different business model to traditional insurance.
- The establishment of macro-prudential monitoring with appropriate insurance representation.
- The strengthening of industry risk-management practices to build on the lessons learned by the industry.