Insurance resolution processes are stable, well-established

In the event of an insolvency of an insurer, the winding-down process is stable that does not pose a systemic risk. The failure of an insurer does not require the same government reaction as failures in the other financial service sectors, says leading international insurance think tank, The Geneva Association, in a new report for the ongoing international financial stability discussions.

The report, Insurance and Resolution in Light of the Systemic Risk Debate, looks into the regimes that exist for resolving insurers and reinsurers. It points out that the insurance balance sheet does not react to stresses in the same way as the banking balance sheet.

Ongoing reserving requirements stabilise the wind-down process, reserves are predominantly held in local legal entities, and reserves are covered by securely invested “tied assets”, depending on local law. The insurance resolution processes are well established in the different jurisdictions and apply to all companies operating in the sector while policyholders’ claims generally receive priority in insurer’s insolvencies.

Secretary General and Managing Director of The Geneva Association Patrick M. Liedtke said: “All insurance companies are obliged to hold adequate provisions for any future claims and are required to match them with high-quality assets, paying out claims and benefits as they occur or fall due over time. It is important to remember that throughout history the wind-down of an insurer has never caused a systemic financial crisis. Any wider development of arrangements for re-organisation and winding-down of cross border insurance undertakings should be based on an extension of existing practice rather than imposing a framework designed to resolve banking problems.”

The report says that what failed at AIG in 2008 was not the core insurance operations but high-risk banking-type business that was run without proper risk control and outside appropriate supervision. It adds that core insurance activities cannot cause systemic risk. Only quasi-banking activities and non-core insurance activities have the potential to cause systemic events that could threaten the stability of the financial system.

Reinforcing the message, Daniel Haefeli, Head of the Insurance and Finance Research Programme at The Geneva Association said: “Several existing mechanisms are in place to ensure that an insurance company is resolved in an orderly manner. An insurance insolvency manifests itself over a protracted time period and an escalating sequence of well-established measures is enacted to prevent the failure or minimise its potential consequences.”