This examines the differing roles of insurers and banks in the global financial system and their impact on the crisis. A key conclusion is that, due to the specific features of the industry, insurers’ and reinsurers’ core activities do not pose systemic risk.
The report has been provided to inform and support supervisors and policymakers in their discussions on the development of measures to address the complex problem of systemic risk exposed during the financial crisis.
In the report, the differing roles of insurers and banks in the global financial system and their impact on the crisis are examined. A key conclusion of the analysis is that the core activities of insurers and reinsurers do not pose systemic risk due to the specific features of the industry:
· Insurance is funded by up-front premia, giving insurers strong operation cash-flow without the requirements for wholesale funding;
· Insurance policies are generally long-term, with controlled outflows, enabling insures to act as stabilisers to the financial system;
· During the hard test of the financial crisis, insurers maintained relatively steady capacity, business volumes and prices.
Applying the most commonly cited definition of systemic risk, that of the FSB, to the core activities and reinsurers, the report concluded that none are systemically relevant for at least one of the following reasons:
· Their limited size means that there would not be disruptive effects on financial markets;
· An insurance insolvency develops slowly and can often be absorbed by, for example, capital raising, or, in a worst case, an orderly wind-down.
· The features of the inter-relationships of insurance activities mean that contagion risk would be limited.
The report underlines that supervisors and policy makers should focus on activities rather than financial institutions when introducing new regulation and that upcoming insurance regulatory regimes, such as Solvency II in the European Union, already adequately address insurance activities.
© Geneva Association
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