Helping Banks is Hurting Insurance Industry Geneva Association Tells G20

In an open letter The Geneva Association directly addressed the Finance Ministers and Central Bank Governors of the G-20 before their meeting in Cannes, France.

It pointed out that amidst all of the concerns over the global economy in general, and the risks posed by potentially insolvent banks in particular, collateral damage was being inflicted on the insurance industry, despite the fact that it does not pose any systemic risks.

“Financial regulators and the IAIS [International Association of Insurance Supervisors] have recently stated publicly that traditional insurance activities do not give rise to systemic risk,” said the letter. “It would be most helpful if the G-20 could formally recognize what is now conventional wisdom among experts and moreover state clearly that any non-core insurance activities will be dealt with bearing in mind the particular business model and role of insurance, while also taking into account regulation already in place or about to be introduced.”

The Association warned that “simplistic regulatory answers, in particular a direct and crude transfer of banking regulation into the insurance sector, will impair the insurance industry’s capacity to play its economic role.”

It also noted that it has been “decades without a single systemic financial crisis” being triggered by any insurance activity. In addition, “the insurance industry is well placed to support economic development and growth due to its shock absorbing capacity as well as its long-term investment perspective. This is particularly relevant at a time when many banks have a significant need for additional capital.”

The letter also noted that designating any insurance entity as an SIFI [systemically important financial institution] “has rightly been decoupled from the banking process.” But the “the potential consequences and implications of any such designation must be carefully and comprehensively assessed before any insurance institution is identified.

“In addition, the resolution schemes for failing insurers, which have never created a systemic crisis, and are stable processes with clearly limited impact, are being tested for how well they will cope with non-core activities.”

The letter warned that it “would be counterproductive if considerations aimed at solving stability issues chiefly located in the banking sector would, through the unintended consequences of an inappropriate designation methodology or an application of unsuitable resolution schemes, threaten the risk-carrying and transferring capacity of the insurance sector.”

The Association also indicated that due recognition should be accorded to the insurance industry’s own regulators, both in the macroeconomic, or global sphere, and in the microeconomic, or local sphere, where competent regulators, who know their own markets have “in-depth insurance expertise and experience.”

It urged the finance ministers and bank governors to take into account the role group supervisors play in “assessing the systemic riskiness of those institutions that carry out systemically risky activities and not only core insurance business.”

Research, conducted by the Geneva Association, “has shown that “economic actors and in particular insurance companies have already suffered from losses in their portfolios triggered by the credit crisis, the subsequent low growth environment, and the general deterioration of creditworthiness in financial markets.”

Anthony Kenneway, spokesman for the Association explained, “the threats to the [solvency] of the banks has resulted in extremely low interest rates, designed to help the banks recapitalize.” However, so far this doesn’t seem to be have been very successful.

It has, however, hit the insurance industry. The letter points out that the “current extremely loose monetary policy of central banks, intended to help the necessary recapitalization efforts of banks, erodes investment proceeds also for insurers, where they constitute a key pillar of income next to insurance premiums: a yield reduction of 100 basis points is estimated to reduce investment income for the global industry by approximately US$226 billion per annum.

“It would be very unfortunate if the healthy insurance industry would not only have to suffer in financial terms from the effects of some high-risk non-insurance activities going critically wrong in the past, but possibly also by inheriting an inappropriate approach to systemic risk and potential SIFI designation process from banking.”

The bulletin concluded: “While insurance is not expected to be on the agenda of the imminent G-20 meeting in Cannes, the well-being of the financial system and the wider economy is. We hope that the leaders of the G-20 countries will take the specificities of the insurance sector into consideration when addressing any issues that could potentially undermine the positive contribution of this industry to economic development and growth.”

The letter was signed by Dr. Nikolaus von Bomhard, President of The Geneva Association and Chairman of the Board of Management of Munich Re, and Patrick M. Liedtke, Secretary General and Managing Director of the Geneva Association.

Source: The Geneva Association