“Uncoordinated reforms will be less effective in promoting financial stability and will undermine the ability of insurers and banks to undertake their core functions in supporting economic activity and recovery,” says Walter Kielholz, IFF working group chairman and chairman of Swiss Re Ltd.

“At a time of important regulatory change, policy makers need to understand how the insurance and banking sectors will interact under the new regulatory regimes,” he adds.

The report, produced in collaboration with Oliver Wyman, notes that as Europe develops Solvency II for implementation in 2013, the Basal Committee on Banking Supervision and the European Insurance and Occupational Pensions Authority have released results illustrating the impact of new regulations. However, both reports were developed independently of one another and do not examine what impact the new measures will have on one another's sector.

Among some issues the report points to:

• There are incentives in Europe for insurers to shorten the maturity of insurer's corporate bond holdings. But such a move “may run counter to the precepts of good risk management and asset—liability management principals by encouraging insurers to shorten the tenor of their asset portfolios while their cash-flow profiles remain generally long-term.”

• Incentives to take on more sovereign debt holdings, while given the current instability in several government bond markets, such a move “may be questionable.”

• Banks will need to raise $750 billion of capital to meet Solvency II requirements, and assumptions are made that the insurance sector would be a ready market for providing new capital and funding, says IIF Managing Director Charles Dallara. He adds that such an assumption “may be overstated.”

“The willingness and ability of the insurance sector to provide a ready market for new capital and funding may be quite limited,” says Axel Lehman, a member of the IFF working group and group chief risk officer and member of the executive committee of Zurich Financial Services.

“Even if insurers were willing to increase their exposure to bank assets in the form of debt, new insurance regulation and sound risk management will tend to mitigate against any further increase, particularly of long term funding,” he says. “Bank debt already makes up a significant portion of insurers' portfolios.”

Lehman went on to say the industry “fully supports stronger regulatory standards,” but that regulation needs to strengthen the financial system.