“Insolvent insurers not a systemic risk”– Insurance Insight

Link to report

Well that is reassuring…isn’t it!?

I have (quickly) read through the report and, whilst it is hard to argue that, based upon past experience, Insurers and Re-insurers ARE of “systemic importance”*, several key points appear to be overlooked…or, perhaps ASSUMED. Probably not the best starting point for such a, potentially significant, report!

Here are a few of the issues that struck me as worthy of comment, or questions:

  • impact of sovereign/banking default or collapse [cascading] on Capital liquidity
  • the inter-connections amongst individual (micro) and institutional investors (macro)
  • lack of transparency in relation to “counter party” relationships          [ins – ins – rein – fin. mkt. – ins – rein, etc.]
  • insurers obtain adequate information to understand, accurately assess and rate risks*, that are,
  • mostly idiosyncratic and uncorrelated”, and
  • “insured loss events are not normally correlated with financial crises or economic cycles” [risk – “known”]
  • reserve and reserving adequacy
  • customer/insurer, etc. implement effective risk management – dampens rather than amplifies risk
  • there is no need to differentiate or adapt risk strategy for uncertainty [unseen – “unknown”]
  • “complexity” is NOT a source of “unseen” risk that, unmanaged, adds to uncertainty
  • major sources of risk are exogenous
  • failure or collapse are gradual, manageable and “top down”
  • Reputational or Operational risks are not  major threats…

…no need to worry about the Institutional disregard for Governance – Risk – Compliance and potential impact of the “moral hazard”, generated by the actions of the prevailing culture. Convince me!

*AIG is referenced in the report

I am not suggesting that the combined intellects and hundreds of years of accumulated subject knowledge have got it all wrong BUT, as is rather obvious, I do wonder at some of these assumptions.

Apparently I am not alone…

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.”

I have lifted this text from an article I wrote on the subject last year, highlighting the difference in approach in USA:

“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,”

What IS undeniable is that the multiple financial and technological inter-connections within the insurance industry and into distribution channels, to financial markets, banks, investment funds, Corporations, enterprises, Communities, etc. are not limited by national boundaries, sector, discipline or scale. So, whilst some are confident that the industry is not – cannot – will not be a source of systemic risk, these “unseen” connections WILL serve as an effective conduit as, apparently innocuous financial “shocks”, are amplified  (courtesy of the “Butterfly Effect”)  and “fuelled” by failure of the most fragile entities within systems/networks as the initial shock spreads and feeds-back with the speed and efficiency that are hallmarks of OUR Digital Age.

The insurance industry cast in the role of super-spreaders of systemic risk when, with greater transparency and a “universal” means of assessing robustness, our insurers could, once again, be “pillars” of [systemic] resilience.

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