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Presentation on
Macroprudential Supervision
ASSAL Meeting Workshop
Yoshihiro Kawai
Secretary General
International Association of Insurance Supervisors
24 April 2012
Agenda
1) Approach to macroprudential
surveillance
2) ICP 24
3) Case studies
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Why we (should) regulate
Macroprudential
approach
• Systemic stability
• (Consumers benefit from sound
and stable financial institutions)
The whole is bigger than the sum of its parts
Microprudential
approach
• Consumer protection
• (Financial stability as an afterthought to solvency regulation)
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Macro- and microprudential approaches
Microprudential
Macroprudential
Limit distress of individual
institutions
Limit system-wide distress
Ultimate objective
Investor/depositor) protection
Avoid macroeconomic costs
linked to instability
Risk
characterisation
Exogenous—independent of
individual behaviour
Endogenous—dependent on
collective behaviour
Correlations and
common exposures
Irrelevant
Important
Calibration of
prudential controls
Bottom up, risks of individual
institutions
Top down, in terms of systemwide risk
Proximate objective
Source: Claudio Borio, “Towards a macroprudential framework for financial stability” (BIS WP 128, 2003 )
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Agenda
1) Approach to macroprudential
surveillance
2) ICP 24
3) Case studies
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The salient principle of ICP 24
The principle of Macroprudential Surveillance
and Insurance Supervision
The supervisor identifies, monitors and analyses
market and financial developments and other
environmental factors that may impact insurers and
insurance markets and uses this information in the
supervision of individual insurers.
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Agenda
1) Approach to macroprudential
surveillance
2) ICP 24
3) Case studies
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Instructions
1) Please divide up in to five separate
groups
2) Discuss the cases and address the
questions given on the next slide
3) Each group will have up to four minutes
to present their answers to the plenary
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Questions
Discuss these questions for all five risks
1. How will the risk impact
a. Life insurers?
b. Non-life insurers?
2. What are possible early warning
indicators for the risk?
3. What should the supervisor do to
mitigate the risk?
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Case 1 for discussion
Risk 1
Default of sovereigns and banks
Definition The risk of sovereign default followed by
wide-spread defaults of banks with credit
exposures to that particular sovereign
Historic
events
• Argentina 2001
• Other stress situations during Latin
America’s debt crisis in the 1980s
Current
parallels
OCE April 2012
• Greece
• Potentially other Eurozone countries
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Case 2 for discussion
Risk 2
Low growth / low investment yields
Definition A prolonged period with subpar economic
growth and low interest rates leading also to
low investment yields
OCE April 2012
Historic
events
• Japan in the 1990s and the current
Current
parallels
• Europe
• Possibly the US
decade
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Case 3 for discussion
Risk 3
Accelerating inflation
Definition A rapid and accelerating increase in the rate
of headline or consumer price inflation well
above the central bank’s inflation target
OCE April 2012
Historic
events
• Latin America in the 1980s and 1990s
• Industrialised economies in the 1970s
Current
parallels
• Argentina
• Selected emerging market economies
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Case 4 for discussion
Risk 4
Trend reversal in interest rates
Definition Typically a sudden and sharp increase in the
prevailing level of interest rates, caused by
either a change in inflation expectations or
distressed financial markets
Historic
events
• Latin America during 1980s debt crisis
• Industrialised economies at the end of the
•
Current
parallels
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high inflation period (late 1970s)
South East Asia during the debt crisis in
1997
• The Eurozone periphery (Greece, Ireland,
Spain, Portugal)
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Case 5 for discussion
Risk 5
Sovereign downgrades
Definition A downgrade (by S&P, for example) of a
sovereign’s financial strength rating,
questioning the integrity of the domestic
benchmark defining the risk free interest rate
Historic
events
• Countries having experienced debt crises
•
Current
parallels
in the past (Latin America 1980s – 1990s)
South East Asia 1997
• Sovereign debtors in the Eurozone
• Selected sovereigns with high sovereign
debt (such as France and the US)
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