According to a new report released by the International Association of Insurance Supervisors (IAIS), there is “little conceptual reason” to consider the insurance industry a systemic risk to global economies unless insurance companies engage in significant activities that go beyond their traditional business models.
IAIS, the world’s largest group of insurance regulators and supervisors, said the 2008 and 2009 financial crisis showed that “in general, the insurance business model enabled the majority of insurers to withstand the financial crisis better than other financial institutions.” The IAIS said that insurance underwriting risks are, “in general, not correlated with the economic business cycle and financial market risks and that the magnitude of insurance liabilities are, in very broad terms, not affected by financial market losses.”
However, the financial crisis revealed that insurance groups and conglomerates operating in traditional lines of business may suffer considerable distress and become globally systemically important when they expand significantly in non-traditional and non-insurance activities. The paper describes how insurance groups and conglomerates that engage in non-traditional or non-insurance activities are more vulnerable to financial market developments and thus more likely to amplify, or contribute to, systemic risk. Examples of such non-traditional and non-insurance activities include credit default swaps transactions for non-hedging purposes or leveraging assets to enhance investment returns.
The IAIS findings echo comments from individual insurers and insurance groups who have been saying that insurers shouldn’t be lumped together with banks, especially at a time when financial industry regulations are being revised following the global financial crisis. Peter Braumüeller, chairman of IAIS’s Financial Stability Committee, noted: “Based on information analyzed to date, for most lines of business there is little evidence that traditional insurance generates or amplifies systemic risk within the financial system or the real economy. However, supervisors need to monitor very closely those insurance activities that deviate from the traditional insurance model.”
What are your thoughts on the insurance industry’s contribution to global systemic risk?