Systemic Risk in the Insurance Sector: Micro- and Macroprudential Policies are not yet Aligned

SAFE/ICIR Lunchtime Series in Brussels: Nathalie Berger, Helmut Gründl, and Tom Wilson discussed systemic risk and its regulatory implications

A functioning insurance sector is important for society, said Helmut Gründl (SAFE, International Center for Insurance Regulation, ICIR, and Goethe University Frankfurt) in his introductory presentation at the second SAFE Lunchtime Series event on 10 October 2018. The event was jointly organized by SAFE and ICIR at the Representation of the State of Hessen in Brussels, bringing together perspectives on systemic risk in the insurance sector from academia, regulators and practitioners.

In his introductory presentation, Helmut Gründl stressed the importance of a well-functioning insurance sector for the society and discussed potential channels how insurers could contribute to systemic risk. He further emphasized that micro- and macroprudential policies are not yet aligned and discussed differences between the entity- and the activity-based approach for identifying systemically important insurers. Gründl presented two current research projects of the ICIR on systemic risk in the insurance sector that help to better understand and counteract systemic risk in the insurance sector.

The first research project introduces a measure of systemic risk that accounts for the slow resolution of economic shocks and illustrates the long-term impact an insurer’s distress can have on the financial system. The second research project, an empirical work, shows how insurance companies can exploit a diversification potential between life and non-life insurance business that can minimize their contribution to systemic risk. He pointed out that both projects can have important implications for the adequate regulatory treatment of systemic risk.

Tom Wilson (see picture), CRO of Allianz SE,opened the subsequent panel discussion from an industry perspective, highlighting the risks originating from large exposures of insurance companies to bank and sovereign debt. According to him, a lack of broad and deep debt capital markets, current insurance and banking regulations, as well as the strong interdependencies between sovereign and bank bonds further impair the situation. He noted that bank debt and sovereign bonds, which can be highly correlated during times of crisis, represent a large proportion of fixed income investments for insurance companies in Europe. To mitigate these systemic concentrations for the insurance sector, he called for a completion of the Capital Markets Union in Europe and for a deeper and vibrant corporate debt market, helping to further diversify the insurers’ portfolios and reduce insurer’s exposure to systemic risk.

A stronger cooperation among policymakers

Moreover, a well-functioning debt capital market would allow for a more direct way for insurers to finance real economic activity. In addition to dissolving the bank-sovereign systemic risk nexus, taking the pro-cyclicality out of the current Solvency II capital requirements by implementing a broader “matching adjustment” is a second important step to improve the status quo in his opinion. According to Wilson, it is critical that these policies be put in place while assuring a level-playing field for insurers on the global level.

Nathalie Berger(see picture), Head of Unit Insurance and Pensions at the European Commission, insisted on the importance of a level-playing field for global insurance companies, which is only achievable through a stronger cooperation among policymakers. Berger underlined the strong financial stability of insurers in the EU since the introduction of Solvency II, but also highlighted the need for continuously taking future developments of the insurance sector into account. She continued with an overview of measures that are currently applicable on the European level to assure stability in the insurance sector and to mitigate systemic risk, including stress tests, the Own Risk and Solvency Assessment (ORSA) or capital add-ons. With regard to the development of Solvency II, she focused on the long-term guarantee package and several countercyclical tools. To make the reassessment successful it is necessary that all stakeholders contribute, particularly by providing detailed data. Berger concluded by stating support for further work on activity-based regulation and for the development of global standard. She emphasized the Commission priority to ensure a level-playing field for European insurers on a global basis.