How Insurers Differ from Banks: A Primer in Systemic Regulation

Christian Thimann
2014 Social Science Research Network  
This paper aims at providing a conceptual distinction between banking and insurance with regard to systemic regulation. It discusses key differences and similarities as to how both sectors interact with the financial system. Insurers interact as financial intermediaries and through financial market investments, but do not share the features of banking that give rise to particular systemic risk in that sector, such as the institutional interconnectedness through the interbank market, the
more » ... transformation combined with leverage, the prevalence of liquidity risk and the operation of the payment system. The paper also draws attention to three salient features in insurance that need to be taken account in systemic regulation: the quasiabsence of leverage, the fundamentally different role of capital and the 'built-in bail-in' of a significant part of insurance liabilities through policy-holder participation. Based on these considerations, the paper argues that if certain activities were to give rise to concerns about systemic risk in the case of insurers, regulatory responses other than capital surcharges may be more appropriate. Abstract This paper aims at providing a conceptual distinction between banking and insurance with regard to systemic regulation. It discusses key differences and similarities as to how both sectors interact with the financial system. Insurers interact as financial intermediaries and through financial market investments, but do not share the features of banking that give rise to particular systemic risk in that sector, such as the institutional interconnectedness through the interbank market, the maturity transformation combined with leverage, the prevalence of liquidity risk and the operation of the payment system. The paper also draws attention to three salient features in insurance that need to be taken account in systemic regulation: the quasi-absence of leverage, the fundamentally different role of capital and the 'built-in bail-in' of a significant part of insurance liabilities through policy-holder participation. Based on these considerations, the paper argues that if certain activities were to give rise to concerns about systemic risk in the case of insurers, regulatory responses other than capital surcharges may be more appropriate. Executive Summary The process of global regulation of systemically important financial institutions is still in full swing. Having completed the regulatory framework for systemically important banks, the Financial Stability Board (FSB) is turning to insurance companies. In 2013, the FSB designated nine insurance companies as systemically important, and it is now in the process of designing systemic regulation for the industry, supported by the International Association of Insurance Supervisors (IAIS). The framework that the FSB has established for insurers closely resembles its framework for banks, culminating in the design of capital standards and the calibration of capital surcharges. This parallel treatment of banks and insurers is also found in a number of important contributions on systemic risk in the academic literature. This paper challenges this approach. It focuses on the distinct business models and balance sheet structures, outlining the main differences and similarities between banks and insurers with regard to their interaction with the financial system.
doi:10.2139/ssrn.2502458 fatcat:wryj2znjb5gvng6khe6tc5gz5u