Enhanced scrutiny of financial institutions in the wake of the Silicon Valley Bank (SVB) and Credit Suisse failures could lead to unnecessary regulatory pressure being piled on insurers with consequences for policyholders and industry, the Global Federation of Insurance Associations (GFIA) has warned.
Insurers are wary of a repeat of regulatory actions seen following the 2008 financial crisis, when there was a tendency for the insurance sector to find itself encompassed within banking regulations, one example being efforts to tackle systemic risk under cumbersome G-SII designations.
In the aftermath of the 2008 crash, the Financial Stability Board (FSB) designated several large insurers as G-SIIs, marking them out as globally systemically important. It later rowed back on this in 2019, when the IAIS’ Holistic Framework came into play, recognizing that most insurers do not typically present a systemic risk.
Insurers are now uneasy around the potential for a repeat as regulators once again zoom in on banks following last year’s SVB and Credit Suisse collapses.
Regulators and policymakers have also become increasingly concerned around the growing role of non-bank financial institutions (NBFIs), with parts of the cohort sometimes referred to as ‘shadow banks’. NBFIs have been seen to include a broad swathe of business and initiatives including crypto-currencies, investment and money market funds, private equity (PE) funds, venture capitalists, and micro-loan organizations.
Insurers fear that they may be bundled into actions to tackle regulation and transparency around NBFIs that are less highly regulated, have more limited public reporting requirements and are “highly interlinked” with other areas of the economy and financial systems.
The GFIA, which represents the interests of (re)insurers from 70 countries, has urged policymakers not to include insurance in any broad brush NBFI changes in the wake of the SVB and Credit Suisse failures, and the organization remains “cautious” on the potential for future “additional and unnecessary” regulations, Angus Scorgie, chair of the GFIA’s systemic risk working group, told Insurance Business.
IMF report sees elevated vulnerabilities in corporate and non-bank financial sectors of major economies #economy #GFSR https://t.co/62naWZ1fEY pic.twitter.com/UBXgZhnJXB
— IMF (@IMFNews) October 16, 2019
National and global organizations – including the European Insurance and Occupational Pension Authority (EIOPA), the International Insurance Association of Insurance Associations (IAIS), the Organization for Economic Co-operation and Development (OECD), and the Financial Stability Board (FSB) – have focused in on the interrelation of banks and non-banks in the wake of the SVB and Credit Suisse collapses.
NBFIs have played an increasingly critical role since the 2008 financial crisis and accounted for nearly 50% of global financial assets as of April 2023, according to International Monetary Fund (IMF) figures. With growth has come increased vulnerabilities and enhanced interconnected risk.
Failings at Credit Suisse, which has since been bought out by UBS, have in part been linked to NBFI business Archegos Capital’s 2021 $20 billion securities fire sale that sent stock prices spiralling downwards.
Credit Suisse took a $5.5 billion loss following the private hedge fund’s default, according to a 2021 Credit Suisse special committee report, even as it grappled with fallout from the failure of Greensill Capital. Morgan Stanley and Goldman Sachs, which also had Archegos Capital exposure, also saw their stock prices tumble.
Given its private status, Archegos Capital was not subject to US Securities and Exchange Committee (SEC) oversight or disclosures.
The GFIA has contended that insurance functions differently to NBFIs such as Archegos Capital as well as banks, and regulators must acknowledge the “unique” way in which it operates and is already regulated, including on solvency and transparency, to avoid any impending action being detrimental not just to insurance companies, but to customers.
“Failing to recognize the important ways in which the insurance sector is unique and applying inappropriate and unnecessary regulation, threatens to undermine the effective functioning of the sector that then impact policyholders who then pay higher costs and offered fewer products,” Scorgie said. “Incorrect regulation not only increases compliance costs and burdens, but also undermines good risk management practices, whilst reducing risk taking and investment capacity.”
Insurers that do engage in banking-like activities may trigger “valid” systemic risk concerns, the GFIA did caveat; however, it pointed to fully funded insurance liabilities, meaning insurers do not rely on borrowed money to pay claims, as setting much of the sector well apart from banks that rely on highly liquid liabilities to provide loans, which it said creates an “inherent mismatch”.
“Policymakers should not apply banking regulations to insurers and they should not include insurers in their concerns about other financial sectors,” Scorgie said. “For regulatory and supervisory purposes, insurers should be recognized as a separate and distinct category, and policymakers should refer to insurers, banks and other financial sectors separately when discussing the financial services landscape.”
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