NU Online News Service, Nov. 17, 3:10 p.m. EST
Underwriting risks are typically not linked to the economic business cycle and financial market risks. Therefore, traditional insurance companies do not pose a systemic risk, concludes a new report by the International Association of Insurance Supervisors (IAIS).
“The financial crisis of 2008/09 has shown that, in general, the insurance-business model enabled the majority of insurers to withstand the financial crisis better than other financial institutions,” says the IAIS.
“Consistent with earlier input from the American Insurance Association and the Financial Stability Board's (FSB) definition of systemically-important financial institutions, the IAIS concluded that insurers' business model is much different from banking,” says David Snyder, vice president and associate general counsel for the AIA, in an email. “Therefore, insurers engaged in traditional insurance activities do not, according to the IAIS, generally pose a systemic risk. AIA will continue to provide input to the IAIS, FSB and FSOC [Financial Stability Oversight Council] as ongoing deliberations are underway regarding [systemically important financial institutions] and global-SiFi methodology and potential designation.”
Traditional insurance companies are less likely to suffer a catastrophic drain of liquidity because an insured event is needed to create a loss and investment portfolios are able to absorb losses.
However, the IAIS says large insurance conglomerates with nontraditional or non-insurance activities could contribute to systemic risk.
“One lesson of the financial crisis was that the systemic relevance of insurance groups is correlated with the influence of activities outside of the traditional insurance business field,” says the report.
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