Systemic Risk

After initial signs last month, there is a growing sense of urgency both within Europe and the US to structure regulatory reforms for the financial services industry, including insurance regulation. The term “systemic regulator” has been mentioned on both sides of the Atlantic.

Within Europe, a report was published last week which made a number of proposals for a new financial services regulatory framework. It proposes a European Systemic Risk Council but the detail still needs to be clarified as it could be too banking orientated. In addition, the report noted the current fragmented nature of EU regulation which did not effectively address the growing complexity of financial market organisations. For insurance, it recommends that Solvency II be adopted quickly and that it adequately addresses the cross-border regulation of insurance groups.

This endorsement of Solvency II is welcomed by the insurance industry and hopefully it will give a necessary boost to the current tri-lateral discussions taking place within the European Central Government.

Within the US, as extended bail-outs are announced, there is a growing call for regulatory modernisation at a national level. Proponents state that enormous companies such as AIG can’t be effectively regulated at a State level but need some form of higher level systemic oversight.

There have been studies before about the possibility of systemic failure within the insurance and reinsurance industry for example, by the Financial Stability Forum. They showed that the industry did not represent a systemic risk to the world economy. It seems that regulators and the industry are now experiencing a practical analysis of the issues on a real time basis.

IUA would still argue that a knee-jerk reaction should be avoided as the vast majority of non-life insurers and reinsurers have avoided the worst effects of the recent financial turmoil. Insurance is different to banking therefore regulatory change should take account of the differing risk transfer mechanisms in place.

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