In light of the vital role the insurance sector plays in the economy, the ESRB has identified four main ways in which it considers the insurance sector can have systemic impact. These four scenarios, set out in section 3 of the Report, are: (i) involvement in “non- traditional and non-insurance activities”, such as speculative derivatives and variable annuities; (ii) procyclicality in asset allocation or in the pricing and writing of insurance; (iii) vulnerability to a so-called “double-hit scenario” where sustained low risk-free rates are combined with a sudden drop in asset prices (which the ESRB has identified as the most pressing of the four systemic risks identified); and (iv) underpricing which, if unchecked, could lead to a lack of substitutes in certain insurance classes deemed critical to the economy, such as liability insurance.
The ESRB considers that reinsurers pose many of the same systemic risks that primary insurers do but in section 4, features specific to reinsurance are analysed which may give cause for concern in the context of systemic risks. Sections 5 and 6 cover incentives in prudential regulation and macroprudential policies and measures respectively, which look at how regulatory authorities are able to address systemic risks in (re) insurance. The Report comments on the anticipated impact of Solvency II in this regard, focusing on the tools available to regulatory authorities. However, the ESRB has questioned whether the tools available to address concerns at a macroprudential level are adequate and recommends further analysis to assess their effectiveness.
A link to the Report is here.