|
|
A worrying trend has, however, emerged. Several regulatory initiatives directed at the banking business were eventually transposed to other financial industries, without an appropriate distinction being made between the vastly different business models which make up the financial sector.
Banks and insurers have significantly different business models and play very different roles in the economy. The core activity of insurers and reinsurers is risk pooling and risk transformation, while that of banks is the collection of deposits and the issuing of loans, together with the provision of a variety of fee-based services.
Consequently, the balance sheet of insurers is economically stable, as fairly long-term policyholder liabilities are matched with assets of corresponding duration. In the case of banks, which engage in maturity transformation, assets and liabilities are not matched, and the average duration of most bank assets is generally longer than the average duration of their liabilities.
Insurers and banks also play quite different roles in relation to the efficient functioning of the whole economy. Banks are part of the payment and settlement system and through their role as credit providers they are the main transmission channel of central banks’ monetary policy. Insurers make an important contribution to economic growth by providing consumers and businesses with protection against negative events.
While this role is also critical for the functioning of the economy, there is no sovereign link and the interconnections are materially different. In particular, there is no balance sheet link between insurers and there is also no “central insurer” as there is a central bank.
The risk profiles of insurance companies and banks also differ fundamentally. Insurance companies are mainly exposed to underwriting risk, market risk and the risk of mismatch between assets and liabilities, whereas the most significant risks to which banks are exposed are credit risk, liquidity risk and market risk. Importantly, the risks faced by an insurer depend on both assets and liabilities and the way they interact.
From a macroprudential point of view, the core insurance business model does not generate systemic risk that is directly transmitted to the financial system. There is far lower contagion risk, higher substitutability and lower financial vulnerability in insurance compared to banking. The financial position of insurers deteriorates at a much slower pace than that of banks and even if an insurer does run into trouble, an orderly wind-up is much easier, since insurers strive to match expected future claims by policyholders with sufficient assets; this facilitates the transfer or run-off of their portfolios.
Insurance Europe supports appropriate improvements to regulatory and supervisory standards for insurers that will maintain a sound and competitive industry and that will foster consumer confidence. But the all too common assumption that regulation which is valid for banking must be valid for insurance is wrong. Rules applied to insurance should fully reflect the profound differences between the business models and risk profiles of the two industries. Applying banking-inspired regulatory frameworks to insurers would have a materially negative impact on the sector and on the whole economy.