Insurance industry a source of stability: Geneva Association

Specific features of the insurance business model make it a source of stability in the financial system, according to The Geneva Association, an international research organization supported by the insurance industry.
For example, insurance is funded by up-front premiums, giving insurers strong operating cash flow without requiring wholesale funding, according to a special report of the Geneva Association systemic risk working group, Systemic Risk in Insurance: An analysis of insurance and financial stability.
In addition, insurance policies are generally long-term, with controlled outflows, enabling insurers to act as stabilizers to the financial system.
During the crisis insurers maintained relatively steady capacity, the Geneva Association notes.
When applying the Financial Stability Board (FSB) criteria to the main activities of insurers and reinsures, none are found to pose a systemic risk, according to the special report.
The association also found only two non-core activities of insurers have the potential for systemic relevance: derivatives trading on non-insurance balance sheets; and mismanagement of short-term funding from commercial paper or securities lending.
“Current and already approved insurance regulatory regimes, such as Solvency II in the European Union, adequately address insurance activities,” the report reads. “The remaining question is whether existing regulation adequately mitigates potential systemic risk from these non-core activities or whether it needs supplementing or replacing with new measures.