Thursday, 19 July 2012
IAIS gives verdict on systemic risk of reinsurance, calls for more supervision
A policy paper published today by the International Association of Insurance Supervisors (IAIS) has concluded that traditional reinsurance is unlikely to cause, or amplify, systemic risk but warned that non-reinsurance activities by certain entities do carry a systemic threat. As a result the IAIS has called on regulators to strengthen surveillance of the reinsurance sector.
Peter Braumüller, Chair of the IAIS Executive Committee
Speaking on the Reinsurance and Financial Stability (RFS) paper’s findings, Peter Braumüller, Chair of the IAIS Executive Committee, said: “Similar to primary insurance, traditional reinsurance is unlikely to cause, or amplify, systemic risk.”
It finds this is the case for the insurance of peak risks, the core business of reinsurers. The findings also apply to the bulk of non-traditional (re)insurance and to most alternative risk transfer (ART) activities.
“Systemic risk may exist, however, in non-reinsurance activities undertaken by certain entities, and the evolving nature of alternative risk transfer products—as well as their affinity to the financial markets in particular—make it prudent to call for continued monitoring of the reinsurance sector and strengthened macro prudential surveillance on national and global levels,” continued Mr Braumüller.
Non-reinsurance activities, such as banking activities (providing credit), credit default swaps (CDS), collateralised debt obligations (CDO) and ‘some forms’ of alternative risk transfer (ART) entail ‘considerable systemic potential’, according to the IAIS.
The financial crisis has shown that, for example, CDS and CDO underwriting without appropriate provisioning carries a considerable potential for systemic risk, added the supervisory body.
Supervisors must be mindful that in recent years non-insurance entities, and in particular entities set up by investment banks, have started to offer longevity and pension services with risk transformation and risk transfer features similar to products offered by non-life and life insurers, it said.
“For that reason, regulators should strengthen both cross-sector micro prudential supervision and macro prudential surveillance of activities identified to have a systemically important potential,” concluded the IAIS.
It is currently developing a methodology to determine whether an entity engaged in non-(re)insurance activities could be a systematically important institution.
The reinsurance paper followed a 2011 IAIS policy paper entitled Insurance and Financial Stability (IFS) that concluded that traditional insurance does not pose a systemic risk.