Geneva Association Reminds Federal Reserve Insurers Aren’t Banks

May 2, 2012

The Swiss-based insurance think tank Geneva Association has followed up on its recent report as to whether or not some insurers should be considered as G-SIFI’s (globally systemic important financial institutions).

The Association has sent a letter to the Federal Reserve Board in response to their consultation on ‘Proposed Enhanced Prudential Standards and Early Remediation Requirements Applicable to Significantly Important Financial Institutions in the U.S.’

The thrust of the letter, as given in an accompanying summary, seeks to establish a dialogue with the Fed to review the special nature of the insurance industry that should be considered before rules that apply to the banking industry are also made applicable to the insurance industry. The letter urges the “Federal Reserve Board to allocate sufficient time to undertake an activities-based approach to develop any incremental regulations for covered insurance companies.”

The main point, which the Association has substantially documented and disseminated, is simply that there is “no systemic risk from traditional insurance activities.” It points out that “banking activities were at the root of the financial crisis,” and that there is “widespread agreement among insurance regulators and international standard-setting bodies that traditional insurance activities have not led to systemic breakdowns or taxpayer bailouts, and showed great resilience throughout the financial crisis.”

It has also stresses that “insurance risk is idiosyncratic and generally uncorrelated with the economic cycle. Insurance is funded by upfront premiums, giving insurers strong operating cash flow without dependence on wholesale third party funding. The insurance industry has a longer-term investment horizon compared with other types of financial institutions, a significant shock-absorbing capacity, and a strategy of matching assets and liabilities closely to ensure that insurers can meet their policyholder obligations.

“In contrast to banks, insurers do not provide maturity transformation, and do not operate transaction processing systems or other financial market utilities that are essential to daily market functioning.”

As a result regulatory regimes in place for insurers “address the risks inherent in the insurance business model, and protect policyholders. These regulatory regimes are continuously undergoing reforms that reflect market developments, including lessons from financial crises. Insurance companies can fail, but their failures take place over an extended time period that allows for orderly planning, and failures are not correlated with the business cycle. Insurance resolutions are stable processes that do not lead to destabilizing runs or taxpayer bailouts. The states operate guaranty funds to manage the resolutions and protect policyholders.”

The letter to the Federal Reserve Board points out that it is “seeking to impose regulations that are more stringent than those in place for banks [on insurers]. This approach is flawed because banking regulations do not address insurance risks and are not appropriate for the very different business model of insurance.”

The Geneva Association recommended that the “Federal Reserve Board work closely with insurance industry experts to design regulations that match the insurance risks being mitigated.”

Source: Geneva Association

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