Right idea 3: global standards for globally systemic insurers While much progress has been made on the home front, the focus of the global reform agenda since the crisis has been on putting a third idea into practice: common global standards for systemically important insurers. The goal of this work is to increase systemic resilience; preventing spillovers from the failure of an insurer to the wider financial sector and the real economy. Policymakers agree that traditional insurance activities need not of themselves be a source of systemic risk. Indeed, recent events demonstrated three reasons why insurers are better able to withstand crises than other financial institutions. First, the underwriting cycle is generally not correlated with the business cycle; Second, the inherent resilience of business models that take a long-term view, and Third, an insurer’s production cycle is inverted as they collect premiums today with a view to paying claims tomorrow. This model reduces liquidity risks and immunises insurers against risks of a run. Insolvency takes time to manifest, and wind-down when it happens has historically been more orderly. Given all that, you might ask: why the concern about systemic risk in insurance? The answer is simple: The financial crisis laid bare that the actions of some individual insurers – like AIG – can have broad spillovers; that some insurance markets – like the monolines – are systemic, and that the insurance sector plays a systemic role in diversifying the financial sector thereby reinforcing its resilience. AIG was the extreme case of a systemic insurer.

That sorry experience highlights the need to understand all the activities in which insurers are engaged, including on occasion substantial business beyond the boundaries of traditional insurance. Regulators have grouped those activities as “non-traditional” and “non-insurance” – including business involving extensive use of market instruments, like derivatives, and instruments that engage in substantial maturity transformation. Where this type of business is carried out in scale or across borders, risks to the system can be substantial. The crisis also showed how particular insurance markets can affect systemic stability. BIS central bankers’ speeches  5  The Monolines demonstrated how sub-sectors that are excessively concentrated or undercapitalised can amplify shocks. The failure of multiple insurance companies in response to economic stress can disrupt the provision of critical economic functions. It can also suddenly transfer risks to other parts of the financial system that may be ill-equipped to manage them; or shift assets around in a way that can amplify and spread distress. As I said previously, the insurance sector is systemic in a positive way. Insurance companies have different risk bearing capacities than many other financial institutions. They play a stabilising role by deploying funds over a longer time horizons, in a manner less vulnerable to sudden outflows. The resilience of large insurers is therefore important to safeguard that positive contribution to the global economy. The starting point for the application of global standards has been the identification of systemically-important insurers.