SYSTEMIC RISK

Proportionate responses

As it contributes to three IAIS consultations, GFIA stresses the need to tailor macroprudential supervision to potential levels of systemic risk

By Nicolas Jeanmart, chair of the GFIA systemic risk working group

Since 2020, the International Association of Insurance Supervisors (IAIS) assesses systemic risk in the insurance sector using its new “holistic framework”. This takes an activity-based and sector-wide approach, rather than making an entity-based assessment.

There has since been work to assist with the practical application of the holistic framework and GFIA has responded to three IAIS consultations in this area in the past year.

Welcome references to proportionality

In May 2021, the IAIS consulted on a draft Application Paper on Macroprudential Supervision. GFIA particularly welcomed the references to, and the application of, the overarching principle of proportionality in macroprudential supervision. Conventional insurance business contributes very little to systemic risk. The application of IAIS guidelines should therefore always be proportionate, as not all insurers have the same exposure to systemic risk or represent the same potential threat to financial stability.

GFIA raised some concerns that the Application Paper had shifted back to an assessment of individual insurers, rather than focusing on the identification, monitoring and assessment of sector-wide vulnerabilities and common exposures that is set out in the holistic framework itself.

Given the differences between insurance markets, the federation also proposed that the Application Paper encourage greater flexibility for supervisors to base their assessments on their knowledge of local markets and companies.

Furthermore, the Paper was largely silent on involving insurers in supervisors’ findings. GFIA therefore suggested that the Paper could be improved by covering the need for supervisors to discuss findings with insurers to ensure a common understanding and to allow insurers to set out how any potential risks can be managed.

“Conventional insurance business contributes very little to systemic risk.”
“In contrast to bank failures, the nature of insurers’ business makes portfolio transfer and run-off over a long period possible, thus requiring a very different set of supervisory tools and level of intervention.”

Two February responses

Back in February 2021, GFIA responded to two other consultations. The first was on a draft Application Paper on Resolution Powers and Planning, and here GFIA stressed the need for the approach to the resolution of failed companies to recognise the differences between the business models of insurers and banks, as well as the low relative risk the insurance industry poses to financial stability. In contrast to bank failures, the nature of insurers’ business makes portfolio transfer and run-off over a long period possible, thus requiring a very different set of supervisory tools and level of intervention.

The second consultation was on the first phase in the development of liquidity metrics as an ancillary indicator for monitoring individual insurers. Here, GFIA noted that liquidity risk for insurers is well managed due to the insurance business model, existing regulatory provisions and insurers’ integrated approach to liquidity and risk management. The liquidity indicators proposed by the IAIS in the first phase, which are based on approaches used in the banking industry, are inappropriate for the insurance sector, given the dependence on individual liquidity profiles of different businesses.

“Liquidity risk for insurers is well managed.”

Further dialogue

GFIA appreciated that the IAIS took note of most of its comments. Where this was not the case, the working group will continue its dialogue with the IAIS to further explain the insurance industry’s points of view. Over the years, the constructive exchanges between GFIA and the IAIS have created an additional incentive for the industry to contribute to the work of the IAIS. GFIA therefore looks forward to participating in future consultations on these topics with a view to developing a fair and functioning systemic risk framework for insurers.

Nicolas Jeanmart

Insurance Europe