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Traditional reinsurance unlikely to contribute to systemic risk: IAIS


July 20, 2012   by Canadian Underwriter


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Traditional reinsurance is unlikely to contribute to or amplify systemic risk, although the financial crisis has demonstrated the same may not hold for non-reinsurance activities, including certain banking activities, notes Reinsurance and Financial Stability, a new policy paper from the International Association of Insurance Supervisors (IAIS).

“Business relationships between cedants and reinsurers establish direct links which are frequently deepened by the extension of risk and capital management services offered by reinsurers,” the IAIS paper says. “This intra-sector connectivity is unlikely to transcend the boundaries of the insurance market and spill over into the broader financial market as long as business relationships are confined to traditional reinsurance activities.”

Primary insurance and reinsurance are fundamentally the same, states the paper, a sequel to last November’s Insurance and Financial Stability. “Primary insurers and reinsurers conduct their businesses based on the same insurance techniques, and both sectors are subject to the same accounting and supervisory rules.”

The IAIS acknowledges “non-reinsurance activities, such as banking activities (e.g. providing credit), credit default swaps (CDS), collateralized debt obligations (CDO), and some forms of alternative risk transfer entail considerable systemic potential.”

That said, the 2008 financial crisis — in which the U.S. Federal Reserve Bank created an $85-billion credit facility to prevent AIG from declaring bankruptcy after the financial arm of the company lost money dealing in credit derivatives — showed activities like “CDS and CDO underwriting without appropriate provisioning carries a considerable potential for systemic risk,” the paper adds. The crisis has further “revealed transparency and disclosure gaps in many financial businesses, and it has shown the need to strengthen supervision in a number of areas across many sectors and jurisdictions.”

Peter Braumüller, chair of the IAIS Executive Committee, says “the evolving nature of alternative risk transfer products — as well as their affinity to the financial markets in particular — make it prudent to call for continued monitoring of the reinsurance sector and strengthened macroprudential surveillance on national and global levels.”

The IAIS, a global standard-setting body whose members include insurance regulators and supervisors from more than 190 jurisdictions, is developing a methodology to determine whether or not an entity engaged in non-(re)insurance activities could be a systematically important institution.


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