After 39 years of gathering, collating and disseminating the facts and figures relevant to the global insurance industry the world’s leaders and shakers are finally paying attention to the findings and recommendations of the Geneva Association.
“There’s now a growing demand for research,” said John H. Fitzpatrick, the Association’s Secretary General. He explained that the type of research it develops is of “growing importance” to the world’s financial community – notably the G20, the Federal Insurance Office (FIO) and global banking and insurance regulators.
“The Geneva Association is committed to making a positive contribution to the development of effective and appropriate systemic risk regulation for the insurance industry,” Fitzpatrick stated in a press bulletin.
At present it’s concentrating on comments and suggestions relating to the latest proposed regulations from the International Association of Insurance Supervisors (IAIS). Fitzpatrick stated that “while the original philosophy behind the methodology as expressed in the IAIS’s November 2011 paper is sound, our submission highlights the areas where the outcome of the current methodology can be adjusted and improved. The system needs to make the best possible use of regulatory capacity by focusing on activities that can create systemic risks and not using that capacity on areas that are not.”
That position is fundamental for the Geneva Association. “We need regulations,” Fitzpatrick said, “and above all group regulation,” but those regulations should be tailored to serve and oversee the sectors of the financial services industry to which they apply. “Insurance companies are not banks,” he continued, and therefore the regulations that apply to them should be specific rather than general.
He noted that politicians and the media have tended to lump “financial services” into a single category. As a result proposed rules for banks will also affect the insurance industry, which is “a completely different business.
“Insurance premiums are paid up front,” he continued. “The liability of an insurance company is to pay claims. Its funds are not otherwise ‘callable;’” i.e. creditors of an insurance company’s policyholders can’t make claims on their policies, unless a covered insurable event has occurred.
This is further backed up, particularly in the P&C sector, which is generally concerned with ‘short-tail’ liabilities, by reserve requirements. In the life sector the length of the policies dictates that life companies invest in assets with the least possible risk, such as government bonds and triple ‘A’ corporates.
Fitzpatrick described the current drive for more regulation as primarily the result of the economic crisis, which has created instability, and in many cases greatly reduced liquidity. In some cases insurers have fallen victim to this condition, notably AIG.
But Fitzpatrick pointed out that there were no cases where a company’s insurance business was directly related to its primary activity – providing insurance coverage – resulted in the types of losses experience by the banks.
Those problems and the losses they produced arose from “non-insurance activities.” As insurance companies have become groups, they have in many cases branched out into areas well outside of their core businesses, such as banking, mortgages and credit issuance. Therefore, it’s not surprising that when these sectors were affected by the financial crisis, so were the companies that engaged in those kinds of businesses.
In Fitzpatrick’s opinion, if groups are going to engage in non-insurance activities, they will require closer supervision in those areas. “We need to understand the difference between hedging to protect assets and speculation,” he said. Where an activity is speculative, “it should require more capital and [stricter] risk management.” These are the areas where the Geneva Association sees potential systemic risk. It doesn’t see that type of risk just because a company or a group of companies happens to be large.
Regulators should “be looking at group supervision, including both insurance and non-insurance activities,” he said. It’s also important that those regulators should possess real knowledge of what they are regulating, which indicates that trying to fit all the regulations into a one size fits all mold doesn’t make sense and probably isn’t possible.
“Essentially insurance regulation should be done by insurance regulators, and banking regulation should be done by bank regulators,” said Fitzpatrick. The Geneva Association’s research and analysis has consistently supported that view.