“Helping Banks is Hurting Insurance Industry” Geneva Association Tells G20

Collapse_smallPlease forgive me for not reaching for the paper tissues  THE real story is that helping banks is hurting …SOCIETY!

Without doubt, the activities of billions of ordinary citizens did not give rise to systemic risk! FACT!

Do we really need to ask, in whose interest is it for the insurance industry to tell only half a story?

OK, so the language is clever “…traditional insurance activities do not give rise to systemic risk”. Hard to argue with. But this communiqué smacks of insurers’ girding their loins in anticipation of the fallout from further, inevitable, global financial turmoil.

Presumably choosing to distance themselves and pointing their fingers at the banks is intended to stave off the threat of further regulation. Even if that is, ultimately, unsuccessful, it may serve to delay unwanted scrutiny and provide the opportunity to adapt the current model. It could also be touted to hard-pressed businesses as a “justification” of a potential tsunami of premium increases that may follow the next financial earthquake: growing seismic activity in the markets serve as a warning.

The insurance industry is, hardly, in the “innocent bystander” category!

Can we really “overlook” the significance of major financial institutions such as insurers or ignore their potential role as “super spreaders” of systemic risk – the US and UK perspectives on this issue were pretty different. To varying degrees, they became infected by a strain of the virus that led many banks to the brink of collapse. Their appetite for high growth strategies, through acquisition of market share, led to their failure to understand and adequately underwrite the risks they already carry:

British firms contain new risks that have not been properly understood or reflected. As a result of this combining with existing pressures on insurers, the insurance sector and the companies it serves could be facing a perfect storm that would form another phase of the financial crisis.Our research suggests that company managements, insurers and investors all need to wake up to face this reality.”

“Fragile” risks on their books can, potentially, provide additional “micro” fuel to the “macro” global banking fire that is still smouldering – courtesy of unsustainable levels of sovereign and Corporate debt.

As the “seismic activity” of unresolved issues from the 2008 global financial collapse gains intensity preparations are well under way for the insurance industry to attempt to “spin” its way out of the spotlight. So, when the shockwaves of the next quake ripple across the globe and cascade into National and local economies, we are expected to believe that these macro events wont trigger and accelerate collapse at micro scale???

“Financial regulators and the IAIS [International Association of Insurance Supervisors] have recently stated publicly that traditional insurance activities do not give rise to systemic risk,” said the letter. “It would be most helpful if the G-20 could formally recognize what is now conventional wisdom among experts and moreover state clearly that any non-core insurance activities will be dealt with bearing in mind the particular business model and role of insurance, while also taking into account regulation already in place or about to be introduced.”

The Association warned that “simplistic regulatory answers, in particular a direct and crude transfer of banking regulation into the insurance sector, will impair the insurance industry’s capacity to play its economic role.”

It also noted that it has been “decades without a single systemic financial crisis” being triggered by any insurance activity. In addition, “the insurance industry is well placed to support economic development and growth due to its shock absorbing capacity as well as its long-term investment perspective. This is particularly relevant at a time when many banks have a significant need for additional capital.”

via Helping Banks is Hurting Insurance Industry Geneva Association Tells G20.

Here’s what the US reckon:

“The Federal Reserve unveiled a rule defining two crucial terms that U.S. regulators will use to determine which financial firms, other than banks, are so risky they warrant tougher scrutiny and regulation,” the Wall Street Journal has learned. The Dodd-Frank financial-overhaul law contains a provision that grants top regulators the authority to designate financial firms as “systemically important,” placing them under central bank supervision and subjecting each to additional capital and liquidity requirements. Several firms at the center of the crisis were subject to uneven or absent regulation, especially big financial companies that didn’t fit the traditional definition of a bank. According to the Journal, “The Fed’s proposed rule defines two key criteria that regulators will use to decide which nonbank financial firms should qualify as systemically important.” First, the rule would permit regulators to label as systemically important only those firms where at least 85 percent of their revenue is related to activities that are financial in nature. “The second part of the rule would direct regulators to look only at relationships between a firm and other institutions that have at least $50 billion in assets or have already been designated by regulators as systemically important,” the Journal adds.

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For what it is worth here is my “take” on where we are, how we got here and WHY the insurance industry IS “systemically important” AND deeply flawed:

Surely, if you consider that sovereign debt is driving the need for more debt [QE, Bonds, etc. based upon future production]; given to banks as re-capitalisation to be; lent back at rates determined by; a deeply flawed Ratings system; to the Governments who sustain; many multi-national banks whose desire is to; continue the process of re-capitalisation; at the expense of; stagnant economies; that lack financial support and; the liquidity to drive innovation and growth from; a society that pay for it all directly, indirectly and through; loss of services, so; have no reason to have any faith or trust in; financially and morally corrupt institutions whose; self-serving mismanagement has been; exposed yet continues unpunished and unabated…

Who underwrites the bonds, rights issues, the M&A’s, the credit, the financial risks..?

It appears to be the case that the; failed high leverage, high growth models adopted by banks and promoted to Governments were seen as the path to enormous wealth and power – for both, IF; financial regulations were “relaxed” to facilitate; mis-selling debt as credit to; leverage and fund an unsustainable illusion of personal wealth whilst; fuelling and reaping the rewards of an; amoral business culture focused upon short-term profit achieved by; market manipulation and; stripping customer value to sustain; a bonus culture that grew at the expense of; widespread, abandonment of Governance and risk management, safe in the knowledge that; politicians who fed-off the tax revenues and presided over; the abuses of public trust as a result of; mismanagement of the Financial Sector, Public budget, services and infrastructure, all of which; WE have paid for already in; the initial loss, bailout costs; rising cost of living; falling salaries; the spiralling burden of personal, commercial and national debt, as well as; a growing gulf in the wealth and living standards enjoyed between the “elites” of society and the; families, businesses and communities who bear a disproportionate amount of the debt burden…not of their making.

We now know that; the “live today pay tomorrow” culture was, so successfully, “sold” to every level of society was; based upon the myth of financial independence has; created a weakened social infrastructure and; enterprises whose robust strategies were sacrificed to deliver results that; the flawed logic of manipulated markets deemed acceptable. These, enterprises were (re)cast in the image of the creators and sponsors of the model; without due consideration of the impact of multiple, converging, “self-similar” strategies and; the fragile characteristics at micro level being communicated to and; weakening the “host” from within and; carrying risk within and across inter-connected industry sectors.

If the findings of Mactavish Consulting are correct (and I have every reason to agree with their assessment – above); the insurance industry, in its indecent hast to apply their own version of the banking model; sacrificed [quality] pursuit of underwriting profit in favour of market share and; incentivised distribution channels to SELL [quantity] protection, resulting in; disincentive for investment in Professional learning, provision of quality advice; abandoning development of a loss prevention culture, in preference for; encouraging policyholder disloyalty and; increasing broker remuneration to unsustainable levels, to; reward adoption of flawed “high growth” and, in the process; funding market consolidation in return for more GWP; marketing price as a/the key metric in determining value; preferring to compromise cover and service (in pursuit of margin), whilst; failing to innovate product, service or rating during “good” claims years.

The (very) sorry truth is that the insurance industry is so “locked-in” to the current model that, even if insurers were intent upon change, they need to, carefully weigh up the consequences of their actions at a time when TRUST in Financial Services companies is at an, understandable, all-time-low.

Trust will only be rebuilt with greater transparency and improved customer value but FS cannot afford either. 

At macro scale we have all the uncertainty of the global – sovereign – market – banking issues as a back-drop, so reintroduction of “strict” underwriting criteria, at a time when policyholders are suffering in the climate, is as difficult to justify as premium increases would be.

For the latter to happen at micro (or nano) scale requires a significant reduction in commission levels. BUT the broking success stories that insurers have created e.g. Consolidators, have become dependent upon current level, the earnings from “add-ons” and referral fees. All of which explains why TRANSPARENCY is seen as a threat to both insurers and brokers.

To avoid “bloodshed” in the industry both need the market to increase (a message so unpalatable that it requires more “spin”)

Brokers: without any significant impact upon commissions.

Insurers: without loss of volume (GWP) from major supporting brokers.

Yet, despite some major natural disasters during 2010/11, the signs are that reinsurance costs will remain stable.

…IMPASSE…unless you happen to have a “contrarian” lurking within the organisation:

What is left is an, opaque, unsustainable model whose resources are over-committed to perpetuating what DID work so well – at the expense of transforming their proposition(s) to better serve customers and long term interests of their shareholders. The landscape has changed and is set for more turbulence, in the form of economic uncertainty and sudden change. The price of failure to innovate (other than for their own benefit) and inability to adapt, will be very high for some! The model is fragile so CANNOT be sustainable.

SO, instead of wasting more money on “spin” and price-led marketing – where price hardly reflects KNOWN risks – it would be better invested in exploring how best to transform the current model to one that IS sustainable, transparent and fit for current & future client and societal needs. The new model needs to be resilient or (per Nassim Taleb) “antifragile”.

If anyone is interested I have some very well-formed ideas…

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