GFIA report highlights uniqueness of insurance industry

Policymakers must consider the significant differences between the insurance industry and other financial industries when considering future regulations, according to a new report by the Global Federation of Insurance Associations (GFIA).

The report, Insurance: A unique sector, explains how the insurance industry “is already highly regulated, with a stable long-term business model that protects people and businesses from financial hardship”, and has much less exposure to systemic and liquidity risks compared to banks and other non-banks.

Susan Neely, president of GFIA, said: “The insurance industry serves people and global economies by pooling and diversifying risks. It is highly regulated, well capitalised and has a proven track record of effective risk management. In addition, insurers’ investments are typically long term, meaning they are less exposed to short-term market volatility. This is what makes the insurance industry unique in comparison to other financial industries. As this new report shows, creating unjustified additional regulations that fail to recognise these differences undermines the effectiveness of insurers and their contribution to society. It will create unnecessary costs that will ultimately be passed on to consumers.’’

The report states that insurers, banks and other financial institutions have traditionally operated in the financial services industry in separate regulatory universes. But it notes that discussions of insurance regulation among global financial regulators continue to draw heavily on the banking model, ignoring important differences between the banking and insurance business models and their risk exposures.

“More recently, there have been a number of concerns raised about financial stability risks from a very broadly defined non-bank financial intermediation (NBFI) sector, which are also often incorrectly projected on to the insurance industry. The NBFI sector is very diverse and includes investment and money market funds, private equity funds, venture capitalists, microloan organisations and cryptocurrencies. Unlike insurers, many areas of the NBFI sector are not highly regulated, have limited public reporting and are highly interlinked with other areas of the financial system and real economy,” says the report.

It goes on to warn: “Failing to recognise the important ways in which the insurance sector is unique threatens to undermine the effective functioning of the sector. It also threatens its important contributions to society – protecting individuals and businesses who find themselves facing financial hardship due to some unforeseen event; supporting economic activity through the spreading and diversification of risk; providing access to healthcare; reducing risks through effective underwriting practices and mitigation initiatives; and as major sources of long-term investment in the broader economy.”

GFIA points out that the insurance industry is already subject to comprehensive regulation, requiring insurers to maintain adequate capital, manage risks effectively, treat customers fairly and uphold robust internal governance. Due, in particular, to its business model, systemic risk is much less of an issue for the insurance industry than for the banking sector, the association says.

The report concludes: “Policymakers should therefore not apply banking regulations to insurers and they should not include insurers in their concerns about other financial sectors. For regulatory and supervisory purposes, insurers should be recognised as a separate and distinct category, and policymakers should refer to insurers, banks and other financial sectors separately when discussing the financial services landscape.”