Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Global insurers pose less systemic risk than global banks


The international insurance and reinsurance think-tank The Geneva Association has been one of the more vocal organisations on the topic of systemic riskiness of global insurers and reinsurers. Back in August they voiced concerns about the International Association of Insurance Supervisors (IAIS) work to identify ‘globally systemically important insurers’ saying that when assessing systemic risk you need to focus on activities of systemic importance.

Now the Geneva Association has followed up by completing and publishing the results of the first piece of research looking into some of the world’s largest insurers and comparing them to banks identified as systemically important. The Geneva Association has published a cross-industry analysis comparing 28 Global Systemically Important Banks (G-SIBs) which were named to 28 of the world’s largest insurers on indicators of systemic risk.

John H. Fitzpatrick, Secretary General of The Geneva Association commented on the research; “This research represents the first empirical and quantitative comparison of insurers and banks using the comparable criteria required by the International Association of Insurance Supervisors’ (IAIS) data calls. The purpose of this analysis is to provide policymakers and other stakeholders with a factual analysis that quantifies the systemic risk of banks versus insurers on these criteria to support their decision-making.”

The analysis concluded that insurers are significantly smaller than banks, with the average banks assets 3.9 times larger than the average insurers, the largest insurer would only rank alongside the 22nd largest systemically important bank. They also found that due to the matching of assets and liabilities on an insurers books an insurance balance sheet can be considered much less systemically risky than a bank of a similar size.

On Credit Default Swaps the research concludes that insurers write considerably less CDS than banks, with the average bank writing 158 times the value of gross national CDS’ than the average insurer. Even the lowest ranked banks write on average 12.5 times the CDS that an average insurer does.

Insurers were found to use substantially less short-term funding than banks. Short-term funding as a percentage of total banks assets is 6.5 times higher than short-term funding as a percentage of insurer assets. Banks are known to put maturity transformation, or borrowing short to lend long, at the centre of their business models and is one of the principal sources of their systemic risk.

On interconnectedness, which is one of the main worries of the work associated with systemic risk, the research finds that insurers are much less interconnected than banks. Banks carry 219 times more gross derivative exposure than the insurer average with even the lowest ranked banks carrying 66 times more gross derivative exposure than an average insurer. Banks owed on average 68 times more than insurers in gross negative derivatives and banks are also owed 70 times more from derivatives counterparties through derivatives exposure. With derivatives exposure being one of the major concerns driving the desire to rank insurers on systemic riskiness the Geneva Association believe banks exposures are significantly larger than the insurance markets.

Fitzpatrick added; “We believe that this research will provide facts useful to regulators and supervisors when they are considering the designation of systemically important insurers. What is clear is that insurers’ involvement in these systemically risky activities is significantly lower than that of the 28 G-SIBs. Furthermore, insurers generally match assets with long dated liabilities and are thus less exposed than banks to the systemic risk caused by borrowing short to lend long.”

Daniel Haefeli, Head of the Insurance and Finance Programme at The Geneva Association, said; “The designation process for global systemically important insurers needs to reflect the facts as described in this report and the specific characteristics of the insurance industry and its business model. If the designation process is not well targeted and not appropriate, the resulting policy measures could reduce the amount of insurance coverage available in the market place. Reducing insurance coverage available could negatively affect global growth potential at a time when the world can least afford it.”

This research will assist the IAIS in making their recommendations regarding identifying globally systemically important insurers and reinsurers. In undertaking the research, the Geneva Association looked at re/insurers such as Swiss Re, Zurich, Allianz, Aegon, Munich Re, Generali, Groupama, Tokio Marine and more.

The one unknown around all of this is quite what the view of non-traditional reinsurance activities will be as that segment of the reinsurance market grows and becomes more capital market-like in nature. This has already been highlighted as a concern by the IAIS (see our other articles below). As reinsurance becomes more like asset management in some cases and instruments like securitization and derivatives become more widely used to facilitate risk transfer among re/insurers, the systemic risk posed by the largest companies is sure to grow somewhat. What is important right now is defining a robust and fair framework for measuring this risk enabling companies to continue operating and managing their own systemic exposures, something that re/insurers with all of their risk management experience should be more than capable of.

You can access the presentation showing the results of the research here.

Here are some links to our earlier articles on this topic (oldest first):

Nov 2011 – IAIS: non-traditional re/insurance activities increase exposure to financial markets

May 2012 – IAIS to identify globally systemically important insurers, ILS are a factor

Jul 2012 – As insurance-linked securities markets grow potential for systemic risk needs to be monitored

Aug 2012 – When assessing systemic risk, focus on activities of systemic importance: Geneva Association

Oct 2012 – IAIS proposes policy measures for globally systemically important insurers

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