Traditional insurance model weathers crisis, study notes

MANILA, Philippines - The International Association of Insurance Supervisors (IAIS) said the recent financial crisis proved that the traditional insurance business model enabled the majority of insurers to withstand the crisis.

In a paper entitled Insurance and Financial Stability, the IAIS provided a perspective of insurance supervisors on the role of the insurance industry and its interaction with the financial system and other financial market institutions. 

The report observed that insurance underwriting risks are in most cases not correlated with the economic business cycle and financial market risks and that the magnitude of insurance liabilities are, in very broad terms, not affected by financial market losses.

“While impacted by the financial crisis, insurers engaged in traditional insurance activities were not a concern from a systemic risk perspective,” the IAIS added.

However, the financial crisis revealed that insurance groups and conglomerates operating in traditional lines of business may suffer considerable distress, and become globally systemically important when they expand significantly in non-traditional and non-insurance activities.

 The report described how insurance groups and conglomerates that engage in non-traditional or non-insurance activities are more vulnerable to financial market developments and thus more likely to amplify, or contribute to, systemic risk.

 Examples of such non-traditional and non-insurance activities include credit default swaps (CDS) transactions for non-hedging purposes or leveraging assets to enhance investment returns.

IAIS Financial Stability Committee chairman Peter Braumüller noted that for most lines of business there is little evidence that traditional insurance generates or amplifies systemic risk within the financial system or the real economy.

However, supervisors need to monitor very closely those insurance activities that deviate from the traditional insurance business model.

“The differences in the impact of failures of insurers and banks should be reflected in the measures applied,” the IAIS chairman added.

 The IAIS is a global standard setting body whose objectives are to promote effective and globally consistent regulation and supervision of the insurance industry in order to develop and maintain fair, safe and stable insurance markets for the benefit and protection of policyholders, and to contribute to global financial stability.

Its membership includes insurance regulators and supervisors from over 190 jurisdictions in some 140 countries.

 More than 120 organizations and individuals representing professional associations, insurance and reinsurance companies, international financial institutions, consultants and other professionals are observers.