GFIA Annual Report 2022-2023

SYSTEMIC RISK

A unique sector

Insurers should be regulated separately from banks and non-banks

By Angus Scorgie, chair of the GFIA Systemic Risk Working Group

The change in economic conditions over the past two years and the shift away from the ultra-low interest rate environment in many parts of the world has contributed to increasing policymaker attention on the non-bank financial intermediation (NBFI) sector.

The global insurance industry has become concerned by this policymaker focus because insurers are often wrongly included with non-banks and so, despite being a sector that is already highly regulated — or even over-regulated, there is a risk of new, inappropriate or unnecessary regulatory burdens for insurers.

Banks, insurers and non-banks are very different

The financial services industry is often seen by regulators as a single, homogeneous industry. This is an oversimplified view, as the industry consists of different sectors, each with its own objective to fulfil its customers’ diverse needs. And this flawed perception that banks, insurers and non-banks are similar leads to the equally flawed assumption that banking regulation needs to be applied to insurance. This very often results in an unsatisfactory outcome for all parties.

As an industry, we have long advocated that policymakers do not blindly apply banking regulations to the insurance sector, given the different business models and therefore the different risks that they pose to the financial system and the real economy. Similarly, we do not consider it justified that recent concerns about the NBFI sector affect the insurance sector.

The NBFI sector is diverse, encompassing many different types of financial institutions, such as money markets, financial intermediaries, venture capitalists, crypto-currencies and microloan organisations. Policymakers’ concerns are typically centred around the lack of regulation and supervisory oversight in some areas of the sector. Historically, the main concerns have been with money market funds or credit funds, which are often subject to little or no regulatory oversight, despite having grown exponentially in recent years.

“We do not consider it justified that recent concerns about the NBFI sector affect the insurance sector.”

“Insurers are exposed to risks that are different in nature, scale and scope to other financial sectors.”

Although there are a few overlapping features with banks and non-banks, insurance is a unique sector. Insurers are exposed to risks that are different in nature, scale and scope to other financial sectors. The important differences are not always well understood by policymakers around the world, which can lead to two wrong assumptions:

that banking regulations and requirements should also be applied to insurers; and,
that concerns about the NBFI sector are directly relevant for insurers too.

The insurance sector provides many benefits for citizens, businesses and the wider economy. Poorly designed regulation and excessive requirements can undermine the role it plays by creating higher costs or fewer products, thus having a material, negative impact on the sector and the economy as a whole.

To raise awareness of this issue, GFIA’s Systemic Risk Working Group is developing a booklet on the different risks non-banks, banks and insurers face as a consequence of their activities, the different risks each therefore poses to the financial system and the fact that distinct regulatory approaches are thus needed at company level and that an activity-based approach is the most appropriate at the macroeconomic level.

Other issues on the radar

Engagement with the International Association of Insurance Supervisors (IAIS) has also been important for GFIA’s Systemic Risk Working Group over the last year.

Individual Insurer Monitoring (IIM) assessment methodology

The IAIS has continued to enhance the Holistic Framework for the assessment and mitigation of systemic risk in insurance, which is made up of an integrated set of supervisory policy measures, a Global Monitoring Exercise and implementation assessment activities. The IAIS work includes a triannual review of risk assessment in the Global Monitoring Exercise, in support of which the IAIS conducted a public consultation seeking input on the IIM assessment methodology used to calculate individual insurers’ systemic risk scores.

In its February 2023 response, GFIA raised concerns about further potential increases in the data-reporting burden in the next round of data collection, including the expansion of liquidity risk-related data.

In reviewing the IIM methodology, GFIA believes the IAIS should carefully select data that is truly necessary to identify systemic or macroprudential risks. It should also consider using publicly available data to the maximum extent possible, taking into account the overall increase in the burden on insurers.

GFIA also highlighted the following key points:

Stability and streamlining of data collection is paramount. New data fields and qualitative components have been added every year with little notice before the changes were implemented. Many of the new data fields are not available from the financial statement and must be produced specifically for the IIM.
IIM data collection should be on a best-effort basis and proportionality should be ensured.
The need to significantly expand data collection about reinsurance businesses is questionable. The combination of the IIM quantitative template, the IIM qualitative questionnaire and the reinsurance component of the Sector Wide Monitoring provides a lot of information on reinsurance exposures and cross-border reinsurance activities.
Participants should have more time to complete the IIM. The timeline should also be provided well in advance, along with the data template and technical specifications.

Draft Issues Paper on roles and functioning of Policyholder Protection Schemes (PPS)

GFIA’s April 2023 response to this IAIS Draft Issues Paper praised it as a welcome addition to the IAIS’s previous work on the topic.

The Paper builds on developments such as the adoption of the revised set of Insurance Core Principles (ICPs) and the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) in November 2019.

In its response, GFIA highlighted four key points:

The importance of having a jurisdiction-specific approach
The need for clear roles and responsibilities for supervisors, resolution authorities and PPS
The overall prudential framework, including any recovery and resolution requirements and PPS, should be balanced and not duplicative
The importance of appropriate funding requirements

Angus Scorgie

Insurance Europe

Angus Scorgie

Insurance Europe

Print version

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.