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07 May 2010

OECD issues paper on impact of the financial crisis on the insurance sector and policy responses


The paper clarifies the nature of the impact of the financial crisis on the insurance sector in OECD economies and reviews governmental and supervisory responses. It also recommends to properly consider the systemically important insurers and to strengthen insurer corporate governance standards.

General policy conclusions
The OECD Insurance and Private Pensions Committee has, on several occasions, discussed the issues raised by the financial crisis and considers that it is important to draw some key policy conclusions from the crisis and its impact on the insurance sector in order to provide further impetus to financial sector reform. These policy conclusions are aimed at promoting financial stability, enhancing the protection of policyholders, and ensuring a level and competitive playing field. The conclusions are the following:
·         Promote strengthened on-going surveillance of the insurance sector and cross-border supervision and information exchange: The OECD insurance statistics framework will be enhanced and its surveillance efforts increased to the extent enabled by OECD resources. The International Association of Insurance Supervisors (IAIS) is also expected to enhance its surveillance activities. These efforts, as well as those of other international organisations and private-sector groups and associations, should be promoted to ensure a concerted and ongoing global surveillance effort on the insurance sector. Continued efforts should also be made to promote enhanced cross-border supervision and the exchange of information among relevant authorities in order to permit better monitoring and supervision of the insurance sector. The IAIS has made major strides in recent years to promote the exchange of information globally.
·         Encourage greater consideration of macroeconomic linkages and macro-prudential risks in insurance sector policymaking, regulation and supervision: Greater consideration should be given in policymaking, regulation, and supervision to the interlinkages between insurance markets and the broader economy, as well as to macroprudential risks. While important, the risks facing individual insurers should be understood in a broader context, including in relation to other institutions in the financial system (particularly given differences in business models) and to broader macroeconomic conditions.
·         Encourage convergence, over the long term, to a common core regulatory framework for internationally active insurers: The financial crisis has highlighted the fragmentation of financial regulation and supervision globally and, thus, the possibilities for regulatory arbitrage and an unlevel playing field. While the insurance sector overall was not, unlike the banking sector, viewed as being seriously adversely affected by or as being a direct cause of the financial crisis, the insurance sector has nonetheless received scrutiny from financial sector policymakers, which has brought some attention to the fact that the insurance sector, unlike the banking sector with the Basel II capital adequacy framework for internationally active banks, has no common core regulatory framework for internationally active insurers.
·         Strengthen insurer corporate governance standards: The crisis has provided some direction as to how existing OECD guidelines on insurance corporate governance can be improved, for instance in relation to board practices and risk management. Taking into consideration recent work by the OECD Steering Group on Corporate Governance, the OECD is working to improve its 2005 guidelines on the governance of insurers and will seek to ensure global consistency with other relevant international principles and guidelines in 2010.
·         Properly consider “too-big-to-fail” and systemically important insurers: Financial institutions (whether engaged in banking, insurance, and securities markets) that are very large may be considered to be too large to fail, potentially leading to moral hazard and thus increased risk-taking behaviour. Governmental authorities should work to address this problem and mitigate risks and, in so far as it is present in the insurance sector, consider the specificities of insurers and their business model. Furthermore, attention should be paid to systemically important insurers which, while not necessarily large, may be so interconnected with other parts of the financial system that their failure could pose risks to financial stability or have an important impact on the broader economy.


© OECD


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