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Resilience of the EU financial sector in the global context - Systemic risks in the insurance sector: key outcomes of the IAIS consultations

Isn’t reinsurance systemically risky? A call for reason and transparency

By Arquint Nina - Head of Group Qualitative Risk Management, Swiss Re

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Since 2013, the Financial Stability Board (FSB), supported technically by the International Association of Insurance Supervisors (IAIS), designates insurers as Global Systemically Important Insurers (G-SII). This is part of the G20 initiative to end “Too-big-to-fail”.

In insurance, pursuing banking activities had been the veritable source of systemic risk. IAIS has therefore copied the size-driven institutional banking methodology and modified it halfheartedly to increase the focus on activities and to decrease the focus on size. However, in insurance, size should actually be acclaimed – not condemned – as it is the prerequisite to enable resilient insurers and reinsurers to absorb risk, including systemic risk.

Early on, when developing the methodology to assess systemic risk, regulators (FINMA: Assessing the potential for systemic risks in the insurance sector, June 2010, IAIS: Reinsurance and Financial Stability, 19 July 2012) have analyzed if reinsurance activities can be a source or amplifier of systemic risk. This is not the case:
1) Reinsurance makes use of transparent directed risk transfer (opposed to in transparent networks, as in banking);
2) Reinsurance fully backs liabilities by technical provisions (opposed to leveraging); and
3) Reinsurance cessions rates are on average 12% – too small to be globally risky.
Prudential regulation ensures 1-3) for reinsurers. Therefore, the answer to the title question is “No – at least not globally, if provided by a supervised reinsurer”.

Systemic risk can occur if there is institutional or geographical concentration risk in the reinsurance covers. However, this risk is local, not global – otherwise the global cession rates must be higher. Surprisingly, IAIS has proposed to introduce these aspects in their 2016 revised global designation methodology. However, the proposed “supplementary reinsurance assessment” is entirely unjustified for the G-SII methodology, which should assess global systemic importance. Of course, concentration risk assessment is needed, but it is ordinary prudential supervision.

If there would be sufficient transparency around the G-SII designation methodology, the concerns (including those regarding reinsurance) could be openly and transparently discussed and resolved. When the first designations of insurers occurred in 2013, IAIS kept secrecy around the method, allegedly to protect the designated companies. So far, this has not changed, and the IAIS continues to keep both the public and companies in ignorance on the calibration, as well as the relative and absolute weight of indicators.

The IAIS must provide:
1) Full public transparency on all (currently 19) indicators. They should disclose
a. the weight (IAIS: reference value) applied in the 2015 and 2016 assessment;
b. the level on which each indicator signifies “systemic risk” according to IAIS;
c. the distribution of each indicator for the companies assessed; and
d. the threshold for the final score to propose a company for designation to FSB.
2) Transparency on its score in all indicators for the assessed company.
The IAIS sometimes seems to hide behind the insurance industry when searching arguments to counter transparency. However, the IAIS serves the public. Public pressure should put an end to the IAIS’ collusion.