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Geneva Association: Insurers Stabilize The Financial System

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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.

The association urges regulators and policymakers to focus on controlling activities rather than financial institutions when introducing new regulations.

To address the kinds of “quasi banking” activities at insurers that could lead to systemic risk, policymakers should:

1. Implement a comprehensive, principle-based supervision framework that can capture significant non-insurance activities.

2. Strengthen liquidity risk management, particularly to address possible problems with management of short-term funding.

3. Enhance the regulation of financial guarantee insurance, which has a very different business model than traditional insurance.

4. Establish “macro-prudential monitoring with appropriate insurance representation.”

5. Strengthen “industry risk management practices to build on the lessons learned by the industry and the sharing experiences with supervisors on a global scale.”

Leaders of Geneva Association member companies, including MetLife Inc., New York (NYSE:MET), in the United States, say they would like to see regulators consider the commentary when debating efforts to regulate systemic risk.