The Geneva Association has submitted its response to regulators on the Proposed IAIS Methodology for Designating G-SIFIs in Insurance.
In a detailed submission to the International Association of Insurance Supervisors (IAIS), based on extensive research conducted over the last two years, the Association called on supervisors to revise and improve the methodology to make it more appropriate for the insurance industry.
“We believe that the development and promotion of effective supervisory and regulatory policies to reduce systemic risk and address information gaps is for the benefit of all concerned, including the insurance sector,” commented Dr Nikolaus von Bomhard, chairman of The Geneva Association and chairman of the Board of Management, Munich Re.
John H. Fitzpatrick, secretary general of The Geneva Association added “While the original philosophy behind the methodology as expressed in the IAIS’s November 2011 paper is sound, our submission highlights the areas where the outcome of the current methodology can be adjusted or improved.
The system needs to make the best possible use of regulatory capacity by focusing on activities that can create systemic risks and not using that capacity on areas that do not.
The insurance business is based on the law of large numbers, that as the number of risks in a portfolio increases, the riskiness of the portfolio decreases. Also, as the lines of business and geographies increase, it diversifies further, reducing the risk of the overall portfolio.
Several of the indicators penalise this natural risk reduction rather than reward it.”
One particular concern of The Geneva Association is the potential for unintended consequences if the methodology is not modified to account for the specificities of insurance. For example, the current inclusion of traditional insurance activities in “large exposures” means that the considerable holdings of government bonds and bank-issued securities owned by insurers would be subject to this indicator. In order to manage their systemic risk ranking, insurers may seek to adjust their holdings in these important assets, making it harder for banks and governments to re-finance.
A copy of the full submission is available at the following link:
http://genevaassociation.org/PDF/Insurance_And_Finance/GA2012_Response_to_IAIS_Consultation-July.pdf
A briefing paper is available at the following link: http://www.genevaassociation.org/LinkClick.aspx?fileticket=XsArGAybPDY%3d&tabid=36
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