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Regulators’ solutions for financial crisis should note differences between banking and insurance models: Swiss Re


March 30, 2010   by Canadian Underwriter


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It’s very important for financial services industry regulators to think about the differences between the banking and insurance industry models when proposing “broad brush” solutions to the world’s economic financial crisis, Swiss Re CEO Stefan Lippe cautioned at the 2010 Swiss Re Breakfast in Toronto.
“It’s very important to talk about the differences between the banks and the insurance because it’s vital to our survival…that regulators don’t get it wrong what our business models are about,” Lippe said.
Lippe noted that the banking model, based on liquidity, is different than that of the long-term financing model of the insurance industry.
“Our model is based on assets, based on long-term financing by our policyholders, and not by short-term debts and commercial papers like [one would see on] the balance sheets of banks,” Lippe said.
The global financial crisis was more of a liquidity issue than a capital issue, Lippe said. Even the one insurer experiencing the greatest difficulty arising from the global financial recession — AIG — did so because of its “banking-like activities.” 
“The only problems we saw world-wide in the insurance industry came from banking-like activities, the most famous example is AIG,” Lippe said. “They didn’t stumble over their insurance activities, but rather from their [use of] CDS [credit derivatives]….”
But even though the insurance model held up well during the crisis, regulators nevertheless face pressure from the politicians to make the world safer, Lippe observed later in an interview after his speech.
International regulators are raising capital requirements for both banks and insurers throughout the world. But the impact of doing this has a distinct impact on the banking and insurance models. 
For insurers, the costs associated with carrying additional capital will lower an insurance company’s return on equity (ROE), and this will not sit well with shareholders. 
If companies have more capital, the financial sector overall may be safer, Lippe cautioned, but for insurers, holding excess capital is bad for business. This is because of the drag effect of excess capital on a company’s ROE, which effectively reduces the value of the insurer in the eyes of its shareholders.


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