|
|
As banks have found some business rendered punitively expensive by new capital regulations, insurers are moving in to finance infrastructure projects and lend to companies. Some pension funds and life insurers have also branched out into the potentially lucrative business of betting on natural disasters by buying so-called catastrophe bonds. In short, insurers are now a crucial part of the so-called shadow banking sector – an emerging hotch-potch of financial groups that are filling the vacuum left by shrinking banks.
All of this change presents new risks to insurance company investors, and potentially to the broader financial system – despite the widespread view that the financial crisis is all but over. The withdrawal of central banks’ massive doses of quantitative easing could yet disturb the fragile health of the financial system, particularly the fast-growing but relatively unobserved shadow banking sector.
To be fair, it is an issue that some regulators are alive to. In a parting interview in October from his role as deputy governor of the Bank of England, Paul Tucker told the Financial Times that regulators needed to “up their game” to avoid the “absolutely disastrous” recreation of old banking risks in other parts of the financial system. Global regulators on the Financial Stability Board have also highlighted the importance of supervising shadow banks. It recently included nine insurers among its list of globally systemic financial institutions that should be closely monitored and held to higher levels of capital adequacy.
But much more needs to be done. There are still no global standards on capital, amid persistently uneven accounting practices. In a symbolic contrast with the realm of banking, the bosses of insurance companies still appear able to reinvent themselves for the post-crisis world. Sir Fred Goodwin and Chuck Prince, the men who led RBS and Citigroup to near-collapse, have become pariahs of the financial sector. The same cannot be said of Mr Sullivan, the former AIG boss. This year he popped up as chairman of an insurer at the venerable Lloyd’s of London market.
Full article (FT subscription required)
Commenting on 8 January, Mike McGavick, Chairman of the Geneva Association in Switzerland, said this article fell foul of two common myths about the potential for systemic risk in insurance.
The first is that AIG is a prime example of how insurers can create systemic risk. It isn’t. At the time of the crisis and the bailout, AIG was a financial conglomerate that owned a large insurance business. The principle problem, caused by writing guarantees on financial products, was a banking business (AIG Financial Products) supervised by a now defunct and discredited Office of Thrift Supervision.
The second myth is that insurers somehow represent a systemic risk. They don’t. Insurance does not engage in leveraging for asset accumulation in combination with maturity transformation. Instead, it is funded by premiums paid up front that provide strong operating cash flow without the requirement for wholesale funding. Insurance policies are generally long term with controlled outflows that led to insurers acting as stabilisers to the financial system during the most recent financial crisis.
The insurance industry supports the G20 initiative to increase the resilience of the financial system and tackle systemic risks. However, any regulations developed for insurers should be designed to match the specificities of the insurance industry and should not be a simple carry-over of rules designed for the banking industry.
Good regulation will support the industry and increase its resilience and contributions to economies and society. Achieving it will require the dispelling of myths and a fundamental understanding of the business of insurance among the regulatory community and elsewhere.
Full information (FT subscription required)