Geneva Association Analysis Compares 28 Banks’, Insurers’ Systemic Risk

December 11, 2012

International insurance think tank, The Geneva Association has published a cross-industry analysis comparing the named 28 Global Systemically Important Banks (G-SIBs) to 28 of the world’s largest insurers on indicators of systemic risk.

John H. Fitzpatrick, Secretary General of The Geneva Association described the research project as representing “the first empirical and quantitative comparison of insurers and banks using the comparable criteria required by the International Association of Insurance Supervisors’ (IAIS) data calls. The purpose of this analysis is to provide policymakers and other stakeholders with a factual analysis that quantifies the systemic risk of banks versus insurers on these criteria to support their decision-making.”

The Association’s effort to apprise regulators of the essential differences between banking and insurance is one of its most important ongoing projects. Fitzgerald discussed the research project in a telephone interview last July. “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 also pointed out 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.”

The Association’s bulletin underscored the following conclusions from its analysis, which reinforce those differences between the banking industry and the insurance industry:
— Insurers are significantly smaller than banks. The average bank’s assets are 3.9 times larger than the average insurer and the largest insurer would rank alongside only the 22nd largest systemically important bank. Furthermore, as insurance liabilities are substantially matched against their assets, an insurance balance sheet is much less systemically risky than that of a bank of comparable size.

— Insurers write considerably less CDS than banks. The average bank writes 158 times the value of gross notional Credit Default Swaps (CDS) than the average insurer. Even the lowest ranked banks on average have 12.5 times the CDS sold by the average insurer.

— Insurers utilize substantially less short-term funding than banks. Short-term funding as a percentage of total banks assets is 6.5 times higher than short-term funding as a percentage of insurer assets. Maturity transformation (borrowing short to lend long) is central to the business model of many banks and is a principle source of their systemic risk.

— Insurers are much less interconnected to other financial services providers than banks. Banks carry 219 times more gross derivative exposure than the insurer average with even the lowest ranked banks carrying 66 times more gross derivative exposure than the average insurer. On average, at the measurement date, banks owed on average 68 times more than insurers in gross negative derivatives and banks are also owed 70 times more from derivatives counterparties through derivatives exposure. If issues develop in derivative markets it is more likely to have an impact on banks than insurers.

Fitzpatrick expressed the Associations belief that “this research will provide facts useful to regulators and supervisors when they are considering the designation of systemically important insurers.

“What is clear is that insurers’ involvement in these systemically risky activities is significantly lower than that of the 28 G-SIBs. Furthermore, insurers generally match assets with long dated liabilities and are thus less exposed than banks to the systemic risk caused by borrowing short to lend long.”

Daniel Haefeli, Head of the Geneva Association’s Insurance and Finance Program, added: “The designation process for global systemically important insurers needs to reflect the facts as described in this report and the specific characteristics of the insurance industry and its business model.

“If the designation process is not well targeted and not appropriate, the resulting policy measures could reduce the amount of insurance coverage available in the market place. Reducing insurance coverage available could negatively affect global growth potential at a time when the world can least afford it.”

Source: The Geneva Association

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