International insurance think tank, The Geneva Association, has published its latest report for the ongoing financial stability discussions at the G-20, Financial Stability Board and International Association of Insurance Supervisors (IAIS). A full copy of the report is available on The Geneva Association web site.
The report, “Insurance and Resolution in Light of the Systemic Risk Debate,” examines the regimes that exist for resolving the problems that arise when insurers’ and reinsurers run onto financial difficulties. “It discusses what the possible impacts could be for some distinctive cases, which include severe stress scenarios, and how supervisors can resolve them using the existing and available supervisory and regulatory tools at their disposal,” said the announcement. “Finally, it provides a number of policy recommendations to strengthen the international resolution regimes further.”
The Association’s research was prompted by the “need to understand better the current and existing resolution measures in insurance and how they relate to systemic risk. When analyzing the potential of systemic risk originating in the insurance industry, the IAIS has concluded that size and spread of global insurance activity is not a decisive indicator for systemic risk and that the interconnectedness between the insurance industry and the banking industry is relatively limited.”
However, it also concluded that “there is a need for a better understanding of the mechanisms involved in an insurance failure and the supervisory actions available should an internationally operating insurer start failing.”
Daniel Haefeli, Head of the Insurance and Finance Research Program at The Geneva Association explained that while “‘living wills’ and resolution regimes are a new concept in banking, several existing mechanisms are in place to ensure that an insurance company is resolved in an orderly manner. An insurance insolvency manifests itself over a protracted time period and an escalating sequence of well-established measures is enacted to prevent the failure or minimize its potential consequences.”
Secretary General and Managing Director of The Geneva Association, Patrick M. Liedtke added: “The analysis shows that insurer wind-downs are stable processes that do not pose a systemic risk. Insurance failures do not require the same government reactions as failures elsewhere in the financial services industry.
“All insurance companies are obliged to hold adequate provisions for any future claims and are required to match them with high-quality assets, paying out claims and benefits as they occur or fall due over time. It is important to remember that throughout history the wind-down of an insurer has never caused a systemic financial crisis.
“Any wider development of arrangements for re-organization and winding-down of cross border insurance undertakings should be based on an extension of existing practice rather than imposing a framework designed to resolve banking problems.”
Source: The Geneva Association
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