Systemic Risk:: are insurers “systemically important”? – Insurance Insight [poll]


Insurance Insight poll question result

roadsignLast week Insurance Insight asked for opinions:

Is it right not to label insurance companies as systemically risk institutions?

Research by the Geneva Association has found an insolvent global insurer would not pose systemic risk to the global financial system. It, therefore maintains that insurance companies should not be labelled systemically risks institutions.

The stakes are so high that erring on the side of caution is the only prudent course…but I suspect that we will just have to wait and see if we get lucky – Systemic Risk:: deep collapse in “nested adaptive cycles”

Systemic Risk:: deep collapse in “nested adaptive cycles”


no-trust-300x225I don’t write this blog because I am intent upon coming across as some smartarse, know-it-all, merchant of doom! Rather, accepting the limitations of my own knowledge, I want, as far as is possible, to inform readers (thanks for your interest!) of issues that affect each and every one of us.

I reckon, if I prompt individuals to ask questions of themselves, me,  employer, politicians, trusted advisors or media sources then that is good. If I can answer questions even better. If I cannot, then that may be all the motivation I need to consider a worthwhile topic further or from another perspective. After all, with the communication tools we have at our disposal in the Digital Age, this IS a “Knowledge Economy”.

Part of the problem, that bothers me, is that many of the established sources of information are not as reliable as they would have you believe. Some only see information through the lens of engrained belief systems – a form of blindness. Others rely upon a cocktail of manipulation and, deliberate, misinformation. If this sounds far-fetched please stop to consider: what we have learnt about the culture in Institutions, in whom we were “happy” to trust; how we came to learn of the nature and scale of “abuse”: how long before “abuses” were admitted; why, despite, such as WikiLeaks, Occupy, etc. so little has changed; when we can expect to see perpetrators held to account for their actions?

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Insurance Industry:: super-spreaders of systemic risk


Who do you believe…not who do you want to believe? Are they or aren’t they?panic button

I am far from an expert on the subject but, from what I do know, I have a “bad feeling” about aspects of the Geneva Association perspective and UK stance (as opposed to USA) on what constitutes “systemically important”. Rather than repeat myself, I have outlined my thoughts in this article which contains links to other, related, items.

If you are interested in getting deeper into the subject, particularly if you like getting into the maths, you are going to have fun with this paper from Nov. 2011: Econometric Measures of Connectedness and Systemic Risk in the Finance and Insurance Sectors Read more of this post

“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…

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Haldane & May: Systemic risk in banking


socio complexityNot news, unless you have been living in a cave…in which case I could probably recommend some more appropriate reading!

Assuming (dear reader) that you have some interest in the topic(s) this is a very interesting piece. It can be found/downloaded here.

Andy Haldane (Director at Bank of England), Mervyn King and Lord May have been on this “tack” for at least 2 years – I have come speeches, papers or presentations on the subject if anyone is interested – and I have referred to their views in various blog articles over that period.

However, I did want to share this section from the conclusion. Because, these gents have recognised that there is a great deal that we can learn, about, both, cause and solution, from Nature. However, as they point out, due to the Political processes that will, inevitably, affect Bank of England, it is unlikely that solutions will be implemented quickly!

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