How Insurers Differ from Banks: A Primer in Systemic Regulation

Abstract

This paper aims at providing a conceptual distinction between banking and insurance with regard to systemic regulation. It discusses key differences and similarities as to how both sectors interact with the financial system. Insurers interact as financial intermediaries and through financial market investments, but do not share the features of banking that give rise to particular systemic risk in that sector, such as the institutional interconnectedness through the interbank market, the maturity transformation combined with leverage, the prevalence of liquidity risk and the operation of the payment system. The paper also draws attention to three salient features in insurance that need to be taken account in systemic regulation: the quasiabsence of leverage, the fundamentally different role of capital and the 'built-in bail-in' of a significant part of insurance liabilities through policy-holder participation. Based on these considerations, the paper argues that if certain activities were to give rise to concerns about systemic risk in the case of insurers, regulatory responses other than capital surcharges may be more appropriate. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior permission in writing of the publisher nor be issued to the public or circulated in any form other than that in which it is published.Requests for permission to reproduce any article or part of the Working Paper should be sent to the editor at the above address. This paper aims at providing a conceptual distinction between banking and insurance with regard to systemic regulation. It discusses key differences and similarities as to how both sectors interact with the financial system. Insurers interact as financial intermediaries and through financial market investments, but do not share the features of banking that give rise to particular systemic risk in that sector, such as the institutional interconnectedness through the interbank market, the maturity transformation combined with leverage, the prevalence of liquidity risk and the operation of the payment system. The paper also draws attention to three salient features in insurance that need to be taken account in systemic regulation: the quasi-absence of leverage, the fundamentally different role of capital and the 'built-in bail-in' of a significant part of insurance liabilities through policy-holder participation. Based on these considerations, the paper argues that if certain activities were to give rise to concerns about systemic risk in the case of insurers, regulatory responses other than capital surcharges may be more appropriate. Executive SummaryThe process of global regulation of systemically important financial institutions is still in full swing. Having completed the regulatory framework for systemically important banks, the Financial Stability Board (FSB) is turning to insurance companies.In 2013, the FSB designated nine insurance companies as systemically ...

CEO Overconfidence and Shadow-Banking Life Insurer Performance Under Government Purchases of Distressed Assets

“…Based on assumptions, it is reasonable to believe that the equity function of Equation (4) is strictly concave, at least in the short run, where there are sufficient conditions of ∂ 2 S/∂R 2 A < 0 and ∂ 2 S/∂R 2 < 0 for optima in a non-simultaneous decision environment. This decision is understood because life insurers do not raise debt to purchase financial assets to cover liabilities towards policyholders (Thimann 2014). It should be noted that while our model is based on the assumption of dichotomy, our results to be derived from our model do not extend to the simultaneous case.…”

The Economics of Insurance, its Borders with Finance and Implications for Systemic Regulation

“…As has been argued elsewhere (Thimann, 2014), capital has a different role in insurance compared with banking, and capital surcharges in insurance are not the instrument for controlling possible systemic risk. It has also been pointed out that capital is a very crude measure, which is not effective when regulatory and supervisory discretion is required to control risk (Tarullo, 2008).…”

“…In this system, banks are institutionally interconnected through the interbank market and their access to central bank operations; their liabilities constitute the means of payment in the economic system; and they are jointly accountable for the stability of deposits as well as the operation of the payment system. Banks can fulfil their statutory functions only as part of a system (Thimann, 2014).…”

Financial sector debt bias

“…In calculating the leverage ratio for insurance companies, we consider liabilities net of technical reserves. Technical reserves represent the net present value of obligations to policy holders and essentially reflect a firm's business model (Thimann, 2014). Technical reserves are tightly regulated, and hence presumably not influenced by taxation.…”