17 August 2011

Leading insurers call for greater cross-sectoral coordination in regulatory reform to strengthen global financial system

The IIF's Insurance Working Group, in collaboration with Oliver Wyman, published a new report today entitled 'The Implications of Financial Regulatory Reform for the Insurance Industry', highlighting the potential impact on the insurance industry of regulatory reforms in both banking and insurance.

The report calls for greater cross-sectoral coordination in developing regulatory reforms. “Uncoordinated reforms will be less effective in promoting financial stability and will undermine the ability of insurers and banks to undertake their core functions in supporting economic activity and recovery”, said Working Group Chairman, Walter Kielholz, a member of the IIF Board of Directors and Board Chairman of the Swiss Re Ltd. He added: “At a time of important regulatory change, policy-makers need to understand how the insurance and banking sectors will interact under the new regulatory regimes. The long-term investment function of insurers in the real economy needs to be preserved through appropriate regulatory incentives”.

Martin Senn, a member of the IIF Board of Directors and Chief Executive Officer, Zurich Financial Services, stressed: “Banks and insurers have different business models and regulation needs to reflect that. But banking regulation affects the activities of insurers and vice versa and both will be less effective if these spill-over effects are insufficiently recognised. Regulatory reform does not need to be harmonised across sectors but it definitely needs to be coordinated”.

Mr Senn said: “We emphatically support the need for improvements in the regulation of the financial sector but the authorities need to pay more attention to cross-sectoral coordination. We would see value in the creation of a standing committee of the FSB charged with examining the consistency of regulation from both a geographical and cross-sectoral perspective”.

The report points out that a failure to understand the differences between insurance and banking and adequately coordinate the regulation underway in both sectors could lead policy-makers to ignore potentially profound implications of changes across sectors and to make unwarranted assumptions about how regulatory reform will operate in practice. The report also highlights incentives provided to banks and insurers under new regulation to place more emphasis on sovereign debt. Given the current instability in several government bond markets, blanket incentives under the new regulatory regimes for banks and insurers to increase their holdings of sovereign debt may be questionable. And, the report examines the interactions between banking and insurance regulation, focusing particularly on the extent to which insurers are currently providers of capital and long-term funding to the real economy and banks, and how new insurance regulation could affect their role in the future.

IIF Managing Director, Charles Dallara, noted: “Assumptions regarding the willingness and ability of the insurance sector to provide a ready market for new capital and funding may be overstated. Current estimates, including those of the BCBS, indicate that banks will have to raise perhaps $750 billion of capital to transition fully to the new requirements. And the need for additional longer term funding to meet the new liquidity requirements will be much greater than that. Even if insurers were willing to increase their exposure to bank assets, sound risk management practices and new insurance regulation will tend to militate against any further increase, particularly of long term funding”.

Press release

© IIF - Institute of International Finance