Geneva Association: Insurers Stabilize The Financial System

Insurance companies that are focusing on selling insurance cause no “systemic risk” and do much to stabilize the financial system, analysts at an insurance think tank write in a new commentary.

The Geneva Association, Geneva, Switzerland, a group backed by insurers and reinsurers, released the commentary as members of the Financial Stability Board – a group formed by the Group of Twenty Finance Ministers and Central Bank Governors, Norwich, United Kingdom — look at ways to reduce and control threats that could hurt the financial system.

The Geneva Association asserts that:

- Insurance is funded by up-front premium payments, giving insurers strong operating cash-flow without the need for wholesale funding.

- Insurance policies are generally long-term, with controlled outflows, enabling insurers to act as financial system stabilizers.

- During the recent financial crisis, insurers maintained relatively steady capacity, business volumes and prices.

In addition, few insurers are big enough for their problems to disrupt the financial markets, and most insurance company solvencies develop slowly, giving regulators enough time to help insurers raise capital or wind down their operations, the association says.

During the financial crisis, the large companies that ran into serious problems faced difficulties because they had mismanaged derivatives trading operations that had nothing to do with insurance operations, or had mismanaged the use of short-term funding from commercial paper or securities lending operations, the association says.