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30 September 2011

Masaaki Shirakawa: Insurance companies and the financial system – a central bank perspective


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Shirakawa, Governor of the Bank of Japan, stressed that insurance companies are an important player in the financial system. It is important that central banks take part in the discussion about the design of regulatory and supervisory frameworks for insurance companies.


Implications for insurance companies

The current state of the global economy and financial markets definitely has significant implications for the insurance business.

First of all, with little room left for fiscal stimulus, central banks in advanced economies have strengthened so-called unconventional monetary policy. While those central banks, including the Bank of Japan, have tried a variety of unconventional monetary policies, one common feature is that a flattening of the yield curve has been observed in the process. If the repair of balance sheets takes a certain length of time, the flattening could also last for that period. For some insurance products that cover a long time period, a slight difference in a discount rate could result in a significant variation in asset value. Therefore, the management of insurance companies as well as the regulatory and supervisory authorities need to consider carefully whether the current low interest rate environment is an exceptional case or not.

Next, increasing risk arising from sovereign debt could call for a review of the risk management practices that have been adopted by insurance companies. Insurance companies have made efforts to match the durations of their insurance payment liabilities and the products in which they invest their insurance premiums. They have invested in super long-term government bonds to address mismatch risk arising from long-term contracts such as life insurance. If the credit risk associated with sovereign debt is not negligible, these risk management practices will become less effective.

Finally, with their long investment horizons, insurance companies are expected to take advantage of market distortions caused by risk aversion among investors with shorter horizons. If insurance companies are currently having difficulties doing this, we need to consider the background to the situation and what the authorities can do to address the issue.

At this juncture, central banks in advanced economies, including the Bank of Japan, are deploying strong monetary easing measures to ensure the global economic recovery. Given that we are already in the uncharted territory of unconventional monetary policy, it is important to weigh the benefit of such policy against its cost by carefully considering the following matters: whether a given policy is having its intended effect; whether it is causing an unexpected distortion in financial markets; and whether there are any other policy options for achieving the same results.

Full speech



© BIS - Bank for International Settlements


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