Why (Re)insurance is Not Systemic

Abstract

The traditional model of (re)insurance lacks the elements that make a financial institution systemically important: risks are effectively pulverized; liabilities tend to be prefunded, which eliminates most of the leverage in the traditional sense; and active asset‐liability management reduces most of the liquidity mismatch that traditionally propagates systemic risk. (Re)insurers that have stuck to this traditional business model have successfully weathered the crisis, even playing a stabilizing role. Unfortunately, this is not sufficiently recognized in the current IAIS/FSB1 debate on assessing systemic risk in the (re)insurance sector.

Systemic Risk in Financial Markets: How Systemically Important Are Insurers?

“…Whether the insurance sector poses a systemic risk is a fundamental issue, and varying opinions have emerged. Kessler () adheres to the traditional view that insurers are not systemically risky. The argument is premised largely on the observation that the traditional insurance balance sheet lacks those characteristics typically associated with systemic risk in other financial institutions.…”

“…Although policy measures for systemically important insurers are now being phased in, much controversy still exists about whether the insurance sector poses a systemic risk and, if so, how this risk should be measured and how systemically important insurers should be regulated. Industry representatives have argued that overall, insurers enhance financial stability rather than pose a systemic risk (Kessler, ). Previous research has criticized the regulatory assessment methodology (Weiß and Mühlnickel, ; Bierth, Irresberger, and Weiß, ), and researchers have argued that a systemic risk regulator for insurance companies would erode market discipline (Harrington, ).…”

Systemic Risk in the Insurance Sector: A Review and Directions for Future Research

“…The windup of an insurer is an orderly process and does not lead to an immediate default on liabilities, the fire sale of assets, or increased cash outflow. Indeed, this process can take up to several years, as described by Kessler (). In principle, this view is shared by the IAIS (), which assesses global systemically important insurers and places only minor weight on traditional life and nonlife underwriting activities…”

Macroprudential Insurance Regulation: A Swiss Case Study

“…The latter reference analyzes the ability of the insurance industry to disrupt the financial market. It is indeed observed that insurers may contribute to the instability of the financial sector, especially through their noncore activities, see [7][8][9][10][11]. These observations are based on systemic risk measures that allow for the study of the interconnectedness between insurers and other financial institutions, see [12][13][14].…”