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The methodology used to create the list of insurers that have been identified by the Financial Stability Board (FSB) and International Association of Insurance Supervisors (IAIS) as potentially posing systemic risk to the financial system has not been sufficiently tailored to the insurance business model. Likewise, the measures that the FSB/IAIS propose to apply to those insurers are not aligned with the actual risks posed by insurers.
“Insurance Europe supports efforts by policymakers to ensure financial stability. However, a system that leads to the identification of insurers, rather than specific activities, that might pose systemic risk is not correct”, said Michaela Koller, director general of Insurance Europe.
Traditional insurance business has been shown not to create or amplify systemic risk, since the business is long-term, funding is generally upfront and liquidity risk and interconnectedness are low. The ability of the insurance industry to take a long-term approach has been widely recognised as allowing it to reduce rather than amplify systemic risks and overall market volatility.
Systemic risks to the financial system primarily stem from activities which result in maturity transformation or liquidity strains and from high levels of interconnectedness. The focus of the approach to system risk should be on identifying and addressing such specific situations.
“Creating a list of global systemically important insurers (G-SIIs) gives the false impression that insurers are systemically important in the way that banks are”, said Koller. “Yet insurance companies and banks have fundamentally different risk profiles, notably in terms of the risk they pose to the financial system.”
The methodology used by the FSB and IAIS has been excessively based on that used to identify systemic risk in the banking sector. “We welcome the recognition by the FSB and IAIS that the size of an insurer, in and of itself, does not create systemic risk concerns. Nevertheless, the methodology being proposed still produces a list of large insurers so we believe it needs further refinement”, said Koller. “In insurance the larger the company or group usually the greater their geographic and risk diversification.”
Insurance Europe believes that the measures that the FSB/IAIS proposes to apply to the insurers on the list also excessively mirror those developed for the banking sector. This has resulted in measures designed to facilitate an expedited resolution process being applied unnecessarily to insurers, which can usually be run-off in an orderly manner over time should they run into financial difficulty. Likewise, higher loss absorbency requirements are typically a measure used in banking, which is generally not suited to addressing potential systemic risk concerns in insurance.
“The proposed framework is too broad, covering activities that do not raise systemic risk concerns, and overlaps with existing prudential regulation”, said Koller. “We believe that greater emphasis should be put on insurers’ robust governance and risk management practices, as well as greater acknowledgement of sound supervisory frameworks that currently exist or are already in the process of being developed.”
Insurance Europe looks forward to analysing the proposals and their impact in more detail and working with the FSB and the IAIS to develop appropriate systemic risk oversight in insurance.
Insurance Europe is a member of the Global Federation of Insurance Associations (GFIA), whose chair, Frank Swedlove, commented: “The GFIA is extremely disappointed that the starting point for both the measures and the methodology to assess systemic risk in insurance was the work done to address systemic risk concerns in the banking sector and has led to a list of G-SIIs published by the FSB. The nature of the assets and liabilities of insurers is very different from that of banks. Any methodology and potential measures to be applied to insurance companies should reflect this reality.”