GFIA Annual Report 2021-2022

SYSTEMIC RISK

Shock absorber

The IAIS Holistic Framework further reduces the low risk of any shocks to the global financial system from insurers

By Nicolas Jeanmart, chair of the GFIA Systemic Risk Working Group

In an era of political and economic uncertainty, policymakers and supervisors are right to focus on minimising any potential shocks to the financial system from different types of businesses. That is why GFIA has always supported the development of an insurance-specific framework for assessing whether any vulnerabilities or potential build-up of systemic risk in the insurance sector could cause disruption to the global financial system and economic activity. And that is why it welcomed the Holistic Framework that the International Association of Insurance Supervisors (IAIS) now uses for assessing systemic risk (see box).

What is the IAIS Holistic Framework?

Insurance: shock absorber not amplifier

GFIA has always argued — and continues to believe — that conventional insurance is not systemically risky and that systemic risk can only originate from a very limited number of activities undertaken on a large scale under the wrong conditions. Insurance is thus fundamentally different to other financial sectors, such as banking in particular, because there is very limited interconnectedness, very limited risk of a run against an insurer and little mismatch between insurers’ assets and liabilities, as well as because of the fact that insurers do not provide critical functions such as payment systems. As the IAIS notes, insurance acted as a shock absorber, rather than an amplifier of vulnerabilities, during the market distress due to COVID-19.

As GFIA pointed out in its response in March 2022 to a Financial Stability Board (FSB) consultation on resolution funding for insurers and internal interconnectedness in resolution planning, not only are insurance failures very rare, but the circumstances in which any failure could or would have a material impact on financial stability are extremely limited. And resolution rules should recognise that, in contrast to bank failures, the nature of insurance business makes portfolio transfer and run-off over a long period possible.

“GFIA has always argued — and continues to believe — that conventional insurance is not systemically risky.”

Holistic Framework reflects insurance business model

When I spoke at an IAIS event in July 2022 on developments in managing and responding to potential systemic risks in the insurance sector using the Holistic Framework, I emphasised GFIA’s support for the Holistic Framework’s activity-based and sector-wide approach, which is significantly more effective than an entity-based assessment. I therefore stressed GFIA’s support for the FSB’s decision to suspend its identification of global systemically important institutions (G-SIIs) in 2019. The approach of applying additional policy measures only to those designated as G-SIIs was fundamentally flawed; GFIA is not aware of any insurer that, on its own, poses systemic risk to the economy. This is why GFIA supports the permanent discontinuation of the G-SIIs designation and related policy measures.

The Holistic Framework (see orange box above), on the other hand, is a fair and well-functioning framework whose implementation is progressing well. It reflects insurance’s unique business model, which is fundamentally different from banking, and increases the resilience of the sector, thereby decreasing the likelihood and magnitude of any systemic impact if risks do materialise. And the Global Monitoring Exercise is a particularly useful tool, as it gathers a huge amount of quality data and increases communication between supervisors and insurers, helping to develop a better understanding of risks and emerging risk-management practices.

“GFIA has always argued — and continues to believe — that conventional insurance is not systemically risky.”

Balance and proportion required

While GFIA is largely happy with the process the IAIS has put in place, including the various application papers, it is important that the balance between costs and benefits is kept in mind. As mentioned earlier, the Global Monitoring Exercise is useful, but any additional data requests need to be carefully considered and be proven to be essential for supervisory purposes. The reporting burden on insurers is already huge and no unnecessary costs should be placed on insurers — or supervisors.

What is also vital in the implementation of the Holistic Framework is that it is applied proportionately to the overall risk in the sector and to the size and complexity of each group. For instance, GFIA supports the development of liquidity metrics for macroprudential monitoring, but these must be proportionate to the overall liquidity risk in the sector, which is low. Insurers’ liquidity risk is well managed due to the sector’s business model, existing regulation and insurers’ integrated approach to liquidity and risk management.

All in all, the Holistic Framework has proven its worth and, from the insurance industry’s perspective, there is no need for further macroprudential reforms at global level.

Nicolas Jeanmart

Insurance Europe

Nicolas Jeanmart

Insurance Europe

Awareness-raising campaigns

Insurers across Europe are involved in a broad range of awareness-raising campaigns. For instance, in Germany, risk-awareness campaigns are implemented jointly by state authorities, consumer protection organisations, the insurance industry, architects and other stakeholders. Their collaboration is built around a common goal: to raise awareness of the effects of climate change and natural hazards, of the benefits of loss prevention, and of best practices as regards natural catastrophe-resilient buildings. The high level of risk awareness in Germany is one of the reasons for the relatively low protection gap; indeed, the insurance penetration rate for natural perils such as storm or hail is more than 90%.
Most European insurance associations have initiatives to raise risk awareness, such as dedicated workshops, events and educational seminars, as well as frequent in-depth articles, themed newsletters, presentations and other publications.
Many French insurers have launched prevention campaigns and also support the campaigns of “Assurance Prévention”, an association founded by the French insurance association (France Assureurs). Assurance Prévention has produced numerous leaflets, infographics, quizzes, etc. to raise awareness of natural risks. Through its initiatives, it aims to develop a “culture of risk prevention” among students and teachers.

The Greek insurance association (HAIC) launched a digital awareness campaign — “Better to know than to think you know” — to provide consumers with useful information about private insurance and to set the record straight on some misperceptions. The campaign consists of six videos to educate the public about how private insurance works. Most of the videos emphasise the need for resilience in the face of natcat risks and the role of insurers in protecting private property. The videos are hosted on the interactive iknow-insurance.gr platform, which allows visitors to do a short quiz to test their knowledge of private insurance and then obtain additional information.
Insurance Sweden is currently working with its members on a common methodology for calculating carbon dioxide emissions during building repairs. The aim is to raise awareness of the impact on CO2 emissions of rebuilding after fire or water damage, and thus of the importance, from that perspective as well, of preventing such damages.
Insurance Sweden published a statistical report in October 2021 on how different municipalities and regions have been affected by damage caused by flooding, storm and fire.
Spotlighting the central role of municipalities in climate-change adaptation, Insurance Sweden ranks Swedish municipalities according to their adaptation work. The methodology is based on the European Commission’s Adaption Support Tool (2013). The ranking is released every other year, the June 2021 version is available here.
UNESPA, the Spanish insurance association, launched a dedicated website in October 2021 — “Naturalmente Protegidos” (Naturally protected) to explain how natcat insurance works in Spain. It focuses on 10 different risks (rain, flood, wind, drought, frost, hail, snow, earthquake, volcanic eruption and lightning) and details for each how insurance covers property, life, harvests and livestock. The website illustrates the success of the Spanish public-private natcat insurance model. It was jointly developed by private insurers (UNESPA), the Consorcio de Compensación de Seguros (CCS) government scheme and Agroseguro, Spain’s agricultural insurance system, and was launched within the framework of Estamos Seguros, UNESPA’s financial education campaign (running since 2016).
In collaboration with CEPYME, the Spanish confederation of SMEs, UNESPA launched in October 2020 “Prevenir para crecer” (Prevent to grow), a website with information on insurance for SMEs. The website highlights potential risks to which SMEs are exposed, including natcat-related risks, and provides advice on how to prevent them.
Insurance Ireland, the Irish insurance association, and a number of Irish insurers have launched consumer blogs and information repositories on their websites to share useful information with consumers about responsible and ESG investing.

Education

The European insurance industry works to increase financial literacy in relation to risk awareness, insurance protection and long-term savings:

The Croatian Insurance Bureau (HUO) launched a first educational project in 2009, “Financial literacy in the Republic of Croatia”, which was followed by a range of educational activities, often implemented jointly with independent insurers. One of these activities, “Safer Tomorrow”, was initiated in 2021, and aims to raise citizens’ awareness of the benefits of insurance. Within the framework of the project, HUO launched several videos and infographics, some of which specifically target young people.
The HUO organises a yearly competition for the best scientific paper, the best graduate thesis and the best undergraduate thesis in the field of insurance. HUO also publishes the “Croatian magazine for INSURANCE”, a scientific journal for professionals to advance good practice in the sector. Finally, some insurers in Croatia created a colouring book for children to promote financial literacy at a young age in a fun and simple way.
In Italy, the ANIA Academy, together with CeTIF (Research Centre on Technologies, Innovation and Finance of the Università Cattolica del Sacro Cuore), launched the second edition (2022) of the 2nd level master’s in insurance management to train professionals and enable them to respond to the challenges of the “new normal”.
ANIA is also collaborating with LUISS Business School to develop a major course in insurance management as part of its Executive Master in Financial Management.
Insurance Europe produces information for consumers as part of its “InsureWisely” financial education initiative. This includes one-pagers on different insurance topics, including how to limit the effects of natural catastrophes.
The French insurance association (France Assureurs) developed a series of educational booklets within the framework of EDUCFI (the French national strategy for economic, budgetary, and financial education), an initiative launched by the French Central Bank. These booklets help users to better understand how insurance works and what insurance products do and do not cover.
The Spanish insurance association (UNESPA) set up a financial education programme for schools, “El Riesgo y Yo” (“The Risk and I”). It involves 40 insurance undertakings and 164 volunteers and aims to give 2 500 teenage school students basic financial knowledge and insights into risk management.