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IAIS release initial analysis of systemic risk and the insurance sector

November 10, 2009; The International Association of Insurance Supervisors (IAIS), as the international standard-setting body for the prudential supervision of the insurance industry and a member of the Financial Stability Board (FSB), welcomed the latest G20 Declaration to continue strengthening the global financial system.

The G20 welcomed the new IMF/BIS/FSB report on assessing the systemic importance of financial institutions, markets and instruments. To assist this work, the IAIS is today releasing its initial analysis of the relationship between the insurance sector and systemic risk. Peter Braumüller, Chair of the IAIS Executive noted “the purpose of this analysis is to identify challenges which insurance regulators face which are distinctly different to regulators of other financial institutions.” These challenges include:

· In the insurance sector, systemic insurance risk does not typically generate immediate shock effects, but plays out over a longer time horizon. As a result, the working definition in the IMF/FSB/BIS report on assessing the systemic importance of financial institutions could usefully be complemented with a timing-related fourth sub element (in addition to size, lack of substitutability and interconnectedness), thus capturing all forms of systemic insurance risk; and

· The distinct business model of insurance means that the policy solutions for systemically risky activities will likely differ between sectors. We look forward to working with the BIS, FSB and IMF in developing the framework of appropriate policy responses that is also applicable to insurers.

The working definition of systemic risk provided by the IMF/FSB/BIS is: ‘the risk of disruption to the flow of financial services that is (i) caused by an impairment of all or parts of the financial system; and (ii) has the potential to have serious negative consequences for the real economy.’

Fundamental to this definition is the notion that systemic risk is associated with negative externalities and/or market failure and that a financial institution’s failure or malfunction may impair the operation of the financial system and/or the real economy.

For analysis on systemic risk and the insurance sector Click here

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