IIF warns insurance regulators about unintended consequences

The IIF says that it endorses the objectives and goals of this work, and emphasizes the importance of assessing the extent to which the activities of insurance firms may be a source of systemic risk. “Correctly drawn up and implemented, a new framework for systemic risk in insurance can reinforce financial stability,” it says.

“However, as currently designed, there is a high risk of detrimental unintended consequences,” it warns, adding that the IAIS should undertake a comprehensive study to assess the potential impact of its proposals on the wider economy.

Charles Dallara, managing director of the IIF, says that it is, “… essential to develop a regulatory framework that is properly tailored to the insurance business model, one that takes full account of its intrinsic characteristics and does not threaten to undermine its social and economic benefits,”

The IIF suggests that insurance regulators are relying too heavily on the methodology and policy measures developed for the banking sector, without taking proper account on the unique characteristics of the insurance business.

It notes that the IAIS acknowledges that there is little evidence of traditional insurance and reinsurance either generating or amplifying systemic risk within the financial system or the real economy. “Consequently, regulators should focus their attention on non-traditional and non-insurance activities which might be potentially systemically risky, in order to address systemic risk concerns,” it says. “Only insurance groups that engage significantly in such activities without proper prudential oversight and adequate risk governance may become vulnerable to financial market developments, and therefore might be considered to potentially pose systemic risk.”

The IIF is particularly concerned about the potential introduction of blanket capital requirements. “In insurance, capital requirements must not punish size or global activity, as that would be a disincentive for effective risk pooling. Increasing the size and global activity of an insurer permits the pooling of risk, thereby contributing to greater financial stability and welfare,” it says. “A blanket capital surcharge on large global insurers would reduce the efficiency of risk pooling and lead to more expensive insurance, less risk capacity and, ultimately, greater reliance on state protection.”

It also notes that the IAIS proposes targeted capital increases on separated activities that have the potential to generate or aggravate systemic risk, and the IIF encourages the IAIS to regard separation and targeted capital surcharges as measures of last resort, “only to be considered after a specific assessment and identification of systemic relevant activities, and only after taking into account risk mitigation activities.”

The IIF maintains that most non-traditional and non-insurance activities are closely linked to traditional insurance and complement each other without being systemically risky. “A separation may eliminate the benefits resulting from such diversification,” it says.

It also calls for a more tailored approach regarding recovery and resolution measures for insurance.

The IIF says that it believes that comprehensive group supervision for global insurance groups should be the primary measure to address potential systemic risk in insurance. “Such an approach should allow supervisors to monitor all group-wide activities on a consolidated basis, with particular focus on non-traditional and non-insurance activities, and to detect and adequately mitigate any potentially systemic relevant activities,” it concludes.