According to the latest report from the International Association of Insurance Supervisors (IAIS), the global insurance sector’s capital adequacy remains generally robust, although there was a slight decline at the end of 2022 – and there could be disruption ahead for the reinsurance market.
The IAIS has released its 2023 Global Insurance Market Report (GIMAR), presenting findings from the Global Monitoring Exercise (GME). This exercise serves as a risk assessment framework to evaluate key risks and trends and identify potential systemic risks in the global insurance sector. The GME utilized data up to year-end 2022 from around 60 major international insurance groups and aggregate sector-wide data from supervisors worldwide, covering over 90% of global written premiums.
Shigeru Ariizumi, IAIS executive committee chair, attributed this trend primarily to financial market dynamics, such as lower asset valuations. However, the overall systemic risk footprint of the insurance sector decreased compared to the previous year.
The decline in systemic risk scores in the insurance sector was driven by reduced exposures in several areas, including short-term funding, liability liquidity, and intra-financial assets. Compared to the banking sector, systemic risk from insurers remains considerably lower.
The report also highlights the significant exposure of insurers to climate-related assets, with considerable investment in climate-relevant sectors, exposing them to transition risk. Physical risks from climate change, particularly the expected rise in claims from natural catastrophic (nat cat) events, could impact insurers’ profitability and challenge capital management, potentially disrupting reinsurance markets.
The IAIS conducted in-depth analysis on two macroprudential themes: interest rate, liquidity, and credit risks in a challenging macroeconomic environment, and structural shifts in the life insurance sector.
“While rising interest rates positively affected insurers’ aggregate solvency positions, they may result in unforeseen cash outflows, such as margin calls on derivatives or policy surrenders. In the evolving digital landscape, lapse risk dynamics may have shifted. Factors such as social media can influence policyholder behavior and the speed at which collective action is initiated. As a result, supervisors are intensifying their monitoring efforts, employing more frequent offsite and onsite supervision. This includes sensitivity analysis and liquidity risk stress testing. Increasing credit risk is also top of mind for supervisors, as are commercial real estate exposures and the insurance sector’s interconnectedness with banks,” IAIS secretary general Jonathan Dixon said.
Supervisors are responding with intensified monitoring, including more frequent supervision and stress testing for liquidity and credit risks. They are also closely observing the life insurance sector, particularly regarding increased asset allocation to alternative investments and reliance on cross-border asset-intensive reinsurance.
The GIMAR also discusses the global reinsurance market in general, which has seen sustained growth but faces challenges from increased nat cat event-related losses, affecting reinsurers’ profitability, especially in the Americas and Europe.
The IAIS plans to continue its close monitoring of the global insurance market and further refine its systemic risk assessment tools, including the development of additional indicators in 2024.
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