Download Global insurance regulation and systemic risk

Global insurance regulation and
systemic risk
Axel P. Lehmann
Group Chief Risk Officer
Madrid, June 7, 2010
Evolution of the systemic risk debate
Systemic risk originally constrained to banking sector as a result of asset-liability and
duration mismatch and highly correlated assets (prone to same shocks) causing banks
to fail in clusters
– Traditional bank run: depositors demand their money back
– Modern bank run: counterparties refuse to renew overnight loans
Regulatory reaction to old-type systemic risk
– Deposit insurance to protect small depositors
– Central bank acting as lender of last resort
Financial crises of the 1990s (Mexico 1995, Asia 1997, LTCM 1998) marked turning
point away from banks as sole causes of systemic risk
– Concept of contagion implies that failure of any financial institution (banks, broker dealers,
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hedge funds, and possibly insurers) and systematic shocks such as currency crises could
quickly propagate to other institutions, markets or the whole financial system
Regulatory reaction to new-type of systemic risk
– Strengthened capital and liquidity provisions
– Macro-prudential supervision of a wider range of financial market players
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Insurance and systemic risk − main findings
in the Geneva Association Report
The insurance business model has specific features that make it a source of stability in
the financial system
Insurance is funded by upfront premiums, providing strong operating cash-flow without
requiring wholesale short-term funding
Insurance policies are generally long-term, with predictable outflows.
Liquidity risk is negligible in the insurance industry
The main risk for insurers is underwriting risk, which is idiosyncratic and can not be
amplified by interactions of industry participants
During the crisis, insurers maintained relatively steady capacity, business volumes and
prices
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Insurers were net buyers of financial assets throughout the crisis and hence exerted a
stabilizing effect on the financial system
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In conclusion − insurance is not
systemically relevant
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Key takeaways
• Implement comprehensive, integrated & principle-based supervision for groups
• The financial crisis was not precipitated by core insurance activities
• Banking and insurance models are fundamentally different and so are systemic risk
implications
• Focus should be on core risk activities and their associated risk profile
• Failure of an insurance firm unlikely to impair the economy
Industry recommendations*
Implement comprehensive, integrated & principle-based supervision for groups
Strengthen liquidity risk management
Establish macro-prudential monitoring with appropriate insurance representation
Strengthen risk management practices
Enhance regulation of financial guarantee insurance
* Source: Geneva Association Report, 2010
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Thank you!