20 February 2018

Insurance Europe: Response to IAIS systemic risk pre-consultation published

Traditional insurance is not systemically risky and systemic risk from individual insurers can only originate from a very limited number of activities undertaken on a large scale in the wrong conditions, according to Insurance Europe’s response to the International Association of Insurance Supervisors' (IAIS) pre-consultation on an activities-based approach (ABA) to systemic risk.

In its response, Insurance Europe said that, while the IAIS' work is at a very early stage and many more aspects need to be clarified, a proportionate and properly-designed ABA could address "domino", as well as "tsunami", views of risk, given the focus on risk management and preventative actions. As such, this would fulfil many of the objectives of the current entity-based approach (EBA). Insurance Europe also said that a holistic ABA should guide the subsequent definition of appropriate policy measures where necessary, with a particular focus on risk management and preventative actions.

Insurance Europe stressed that the EBA is simply not appropriate for assessing systemic risk in insurance, because this risk should always be determined holistically rather than through the use of the current Global Systemically Important Insurers (G-SII) assessment indicators that are biased towards measuring the size of an insurance group.

In Insurance Europe's view, an assessment of systemic risk should go beyond merely identifying whether activities giving rise to potential vulnerabilities exist, but also consider whether the risk stemming from these activities can actually be transmitted to the wider global financial system, and how this is mitigated in practice. A link to the global financial system through transmission channels should be clearly identified and the level of diversification within the insurance group should be adequately considered.

Insurance Europe also emphasised that the materiality of the potential systemic risk transmitted to the financial system should be an essential consideration under an ABA. In the assessment of materiality, additional factors which may act as mitigants of systemic risk should be duly considered, to ensure the accuracy of any assessment of an activity's systemic risk potential.

Full response

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