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Insurers more vulnerable to financial crisis as they branch out into non-insurance financial activities: IAIS


November 15, 2011   by Canadian Underwriter


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The traditional insurance model has allowed property and casualty insurers to withstand the recent financial crisis, but as insurers branch out from this model and offer more non-insurance related products, they are more vulnerable to financial risks associated with the crisis, according to a paper by the International Association of Insurance Supervisors (IAIS).
The association of international insurance regulators released the paper, entitled Insurance and Financial Stability, on Nov. 15. It says the recent financial crisis has shown that the traditional insurance business model enabled the majority of insurers to withstand the crisis “considerably well.”
“While impacted by the financial crisis, insurers engaged in traditional insurance activities were not a concern from a systemic risk perspective,” the paper says.
The report further observes 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.
However, the paper adds: “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 paper goes on to describe 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,” it says.
“Based on information analyzed to date, 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,” said Peter Braumüller, chairman of the IAIS financial stability committee. “However, supervisors need to monitor very closely those insurance activities that deviate from the traditional insurance business model.”