Leading financial institute warns that Solvency II could go against risk management best practice
Financial sector lobbyists have questioned the impact of regulatory reforms in both banking and insurance. A recent report by the Institute of International Finance (IIF) calls for greater coordination in regulatory reforms.
“Uncoordinated reforms will be less effective in promoting financial stability and will undermine the ability of insurers and banks to undertake their core functions in supporting economic activity and recovery,” said Walter Kielholz, a member of the IIF board of directors and chairman of Swiss Re.
The report draws attention to the incentives in Solvency to shorten the maturity of insurers’ corporate bond holdings. This may go against good risk management practices by encouraging insurers to shorten the tenor of their asset portfolios while their cash-flow profiles remain long-term.
The report also highlights incentives for insurers to place more emphasis on sovereign debt. Given the current instability of government bond markets, this policy would need to be questioned.
Both the Basel Committee on Banking Supervision (BCBS) and the European Insurance and Occupational Pensions Authority (EIOPA) have released results illustrating the impact of new regulations. However, the IIF believes that these studies do not consider the effect each set of new regulations will have on the other.
“Banks and insurers have different business models and regulation needs to reflect that. But banking regulation affects the activities of insurers and vice versa and both will be less effective if these spill-over effects are insufficiently recognised,” said Martin Senn, a member of the IIF board of directors and CEO of Zurich Financial Services.
For the IIF’s release click here.
