The Geneva Association Calls On G20 To Look Carefully At Fresh Regulation And Supervision

Leading international insurance economics think tank, The Geneva Association, today made clear its concerns about the potential impact of regulatory and supervisory reactions on the insurance industry in the wake of the credit crisis.

With regulation and supervision of the financial services sector on the agenda of the G20 meeting taking place in St Andrews, Scotland tomorrow (6 November 2009), The Geneva Association has called on Finance Ministers and Central Bank Governors of the G-20 to recognize the key considerations that must be taken into account in order to realize the most successful and constructive outcome from regulatory and supervisory reform of the financial services industry.

The letter calls for any future sector regulation to take into account the specific characteristics of the insurance business model, to avoid pro-cyclical effects and strike an appropriate balance between financial stability, consumer protection and a level competitive playing field.

Letter to the G20.
Sirs,
Progress made under the action plans of the G-20 has contributed
to tangible signs of economic recovery. Various indicators show
that financial stability has been restored even if further
economic and social impacts of the financial crisis are still
ahead of us.
A few weeks after very fruitful and intense discussions with
insurance supervisors from around the world at the Annual meeting
of the International Association of Insurance Supervision (IAIS),
The Geneva Association is pleased to share its views ahead of your
meeting on 6 & 7 November 2009. The Geneva Association is a global
organization representing 80 Chief Executive Officers (CEOs) from
the world's leading insurance and reinsurance companies.
1.                      The (re)insurance Industry acts as stabilizer for the Global
                        Economy. The (re)insurance sector is a major contributor to
                        the efficient functioning of advanced and emerging economies. It
                        has a long-standing history of being an economic shock absorber
                        and source of capital to support economic growth and social
                        development. It protects people and companies against uncertainty,
                        with a long-term perspective. It provides stability by pooling the
                        risks of insurable perils, thereby enabling individuals and
                        businesses to undertake activities that would individually be too
                        costly or too risky and contributing to economic growth. Exposure
                        to liquidity risk is low, mainly due to its inversed funding
                        cycle. A deep understanding of both the functioning and the role
                        of the (re)insurance sector is necessary to design an adequate
                        regulatory framework preserving the role of the industry as a key
                        contributor to financial stability and economic growth.
2.                      Governments, supervisors and all market participants, including
                        the (re)insurance industry, must draw from the lessons of the
                        crisis. There is a general consensus that the (re)insurance
                        industry was not at the origin of the financial crisis. Overall,
                        it weathered the crisis relatively well, even though it was not
                        immune from the turmoil. Business models of financial institutions
                        vary from one sector to another, and this is reflected in
                        differences in the supervisory regimes. It is vital that the
                        specificities of (re)insurance are taken into account in the
                        design of any new supervisory architecture and rules governing the
                        (re)insurance sector. For its part, insurers and reinsurers have
                        drawn their lessons from the crisis, including recognition of the
                        need to continue to strengthen their internal risk governance to
                        respond to changing market conditions.
3.                      Macro prudential supervision is necessary and the (re)insurance
                        supervisory sector should be appropriately represented on
                        macro-supervisory boards. In light of the recent financial
                        crisis, there is a need to monitor overall macro-economic risks
                        that could threaten the stability of the financial services
                        sector. This monitoring should be based on a sound understanding
                        of the different risk characteristics of the sectors of financial
                        services. Insurers and reinsurers are less exposed to liquidity
                        risk, not highly leveraged and less interconnected within the
                        financial services industry. Therefore, the identification and
                        assessment of potential sources of systemic risk requires a sound
                        understanding of the (re)insurance industry, particularly given
                        its important role as a financial investor. Against this
                        background, (re)insurance expertise should be adequately
                        represented in the FSB and any other macro-supervisory boards and
                        relevant working groups. We are ready to work together with the
                        regulatory community on the question of what could possibly
                        constitute a systemic risk for (re)insurers.
4.                      Macro prudential supervision should go beyond the mere
                        supervision of institutions qualified as "systemic". Thanks to
                        supervision and existing reserving mechanisms, regulators can
                        intervene early on in the event that a (re)insurer encounters
                        financial difficulties. In the event of an (re)insurer's failure,
                        competitors will easily provide capacity and services. Moreover,
                        size is an element of risk mitigation in the case of (re)insurers
                        as the value proposition of (re)insurance relies on risk pooling
                        and diversification. The temptation to establish a list of
                        so-called "systemically relevant institutions" could paradoxically
                        make the whole system riskier, potentially affecting the level
                        playing field between institutions and introducing moral hazard.
5.                      Overly prudent capital requirements should not be imposed on
                        the (re)insurance industry. As stated above, the (re)insurance
                        industry has weathered the global financial crisis relatively
                        well. Its business model and characteristics fundamentally differ
                        from those of the banking sector and it is vital that future
                        regulatory proposals should appropriately distinguish between the
                        two sectors. In particular, the (re)insurance sector's financial
                        performance during the crisis evidences that there is no need for
                        overly prudent capital requirements to be imposed on the sector.
                        Moreover, the temptation to use macro prudential oversight to
                        justify overly prudent requirements on the levels of capital in
                        the (re)insurance sector should also be resisted.
6.                      There should be a more globally consistent supervisory and
                        regulatory framework including effective group supervision. We
                        support the G-20 call for a more globally consistent supervisory
                        and regulatory framework to ensure a level playing field and to
                        avoid regulatory arbitrage. There is clearly a need for greater
                        co-ordination and information sharing between supervisory
                        authorities and this is especially true at the international
                        level. The IAIS plays a central role in fostering international
                        cooperation and consistency. The Geneva Association also calls for
                        a comprehensive and coordinated supervision of cross-border groups
                        under the lead of a fully recognised group supervisor, whereby
                        consistent decisions apply to the group and its constituents.
                        Effective Group Supervision is a prerequisite to efficient micro
                        and macro prudential supervision. During the crisis, group
                        supervision - where it was enforced - strengthened the capacity of
                        the industry to weather market turmoil. Robust risk management
                        tools put in place to address risk-sensitive micro prudential
                        requirements could also be used to refine macro prudential tools
                        assessment.
                        The industry stands ready to further contribute to the debates and
                        to meet with the G-20, the IMF, the BIS and the FSB and their
                        working groups. The Geneva Association is confident that a strong
                        (re)insurance industry is a key ally in our common quest to
                        restore sustainable economic growth and create jobs.

Sincerely yours,
Dr Nikolaus von Bomhard                                  Patrick M. Liedtke
President of The Geneva Association                      Secretary General and Managing Director
Chairman of the Board of Management, Munich Re Group     The Geneva Association

About The Geneva Association

The Geneva Association is the leading international insurance "think tank" researching strategically important insurance and risk management issues.

The Geneva Association identifies fundamental trends and strategic issues where insurance plays a substantial role or which influence the insurance sector. Through the development of research programmes, regular publications and the organisation of international meetings, The Geneva Association serves as a catalyst for progress in the understanding of risk and insurance matters and acts as an information creator and disseminator. In parallel, it advances--in economic and cultural terms--the development and application of risk management and the understanding of uncertainty in the modern economy.

The Geneva Association membership comprises a statutory maximum of 80 Chief Executive Officers (CEOs) from the world's top (re)insurance companies. It organises international expert networks and manages discussion platforms for senior insurance executives and specialists as well as policy-makers, regulators and multilateral organisations. The Geneva Association's annual General Assembly is the most prestigious gathering of leading insurance CEOs worldwide.

Established in 1973, The Geneva Association, officially the "International Association for the Study of Insurance Economics", is based in Geneva, Switzerland and is a non-profit organisation funded by its members.

For more information please visit www.genevaassociation.org

SOURCE: The Geneva Association

For further information:
The Geneva Association
Anthony Kennaway, +41-22-707-66-06
Head of Communications
anthony_kennaway@genevaassociation.org