IAIS: ART poses systematic risk
Non-reinsurance activities such as alternative risk transfer (ART) could cause or amplify systemic risk, according to the International Association of Insurance Supervisors (IAIS).
IAIS has released a policy paper on reinsurance and financial stability. The policy paper is follow up to an earlier paper on insurance. It examines the relationship between reinsurance and financial stability, and whether traditional reinsurance-related activities pose systemic risk. “Non-reinsurance activities, such as banking activities (e.g. providing credit), credit default swaps (CDS), collateralised debt obligations (CDO), and some forms of [ART] entail considerable systemic potential. The financial crisis has shown that, for example, CDS and CDO underwriting without appropriate provisioning carries a considerable potential for systemic risk.” “Supervisors must be mindful that in recent years non-insurance entities, and in particular entities set up by investment banks, have started to offer longevity and pension services with risk transformation and risk transfer features similar to products offered by non-life and life insurers. The IAIS is currently developing a methodology to determine whether an entity engaged in non-(re)insurance activities could be a systematically important institution.” In conclusion, the paper says: “[T]raditional reinsurance is unlikely to cause, or amplify, systemic risk, but that the case may prove to be different for non-reinsurance activities. It also finds that while reinsurance establishes intra-sector connectivity, the mainly hierarchical structure of the (re)insurance market dampens any propagation of shocks.” “Similar to primary insurance, traditional reinsurance is unlikely to cause, or amplify, systemic risk,” said Peter Braumüller, the chair of the IAIS executive committee. “Systemic risk may exist, however, in non-reinsurance activities undertaken by certain entities, and the evolving nature of alternative risk transfer products—as well as their affinity to the financial markets in particular—make it prudent to call for continued monitoring of the reinsurance sector and strengthened macroprudential surveillance on national and global levels.”