In a letter to the G20 members, the Geneva Association, an organization comprised of CEOs from the world’s leading insurance and reinsurance companies, provided recommendations for more effective regulation of the insurance and reinsurance industry, along with information and analysis regarding the differences between the insurance and reinsurance industry and that of the banking industry. The following are summaries of the letter’s five key sections:
- General Remarks. The insurance and reinsurance industry is of vital importance to world’s economy and its business model is resilient and continues to operate normally, even as inter-bank lending seized up and credit activity at private banks was severely reduced. While insurance and reinsurance operations have not contributed to the current global financial instability, it has been impacted by the deterioration of the capital markets. However, risk diversification and the mostly uncorrelated relationship between insurance risks and market risks have so far contributed to maintaining stability in the insurance and reinsurance market.
- Financial Stability and Insurance. Transnational coordination is necessary to adopt an appropriate strategy to address the issue of the current global financial crisis, to ensure maximum impact of the measures taken, and to safeguard a level playing field. Systemically important institutions should be identified through globally consistent, clear, and straightforward criteria utilizing a risk-based framework and should be supervised on a consolidated basis. Further, in order to maintain the resiliency of the insurance and reinsurance market, stabilizing forces such as the acquisition of weaker competitors by peers and the use of run-off solutions should be employed. Government intervention should be the absolute exception.
- Supervision and Regulation. The future supervisory architecture should be built on a sound foundation of national regulation that takes into account the differences between insurance and reinsurance and other financial service providers. Uncoordinated national responses and protectionism are counterproductive to the proper functioning of the financial markets and harm the international exchange of goods and services. Regulatory reform must be focused, measured, and considered to avoid such dangers as excessive capital requirements, which are as dangerous as insufficient capital requirements.
- Risk Management. There should be a coordinated effort to collect information on global financial interconnectedness. Individual insurance and reinsurance companies should have strong and independent risk management that focuses on the transparency of risks, sustainable asset and liability management, large counterparty risks, and the use of internal modeling, stress testing, and scenario thinking.
- Accounting and Value Measurement. In times of extreme short term liquidity and distressed markets, other valuation approaches that better represent economic realities may have to be employed rather than market-based valuation. When insurers hold assets to maturity, flexible supervisory practices are vital to prevent an exacerbation of an already difficult situation.
To see a full text of the letter, click here.