Banks and Financial Non-Banking Institutions: the Insurance Perspective

Insurers bring value to both individuals and businesses, letting them operate with confidence that they will not be left exposed to losses from unexpected events and playing a critical role in helping people save and grow their wealth. 

As one of the largest institutional investors, alongside pension funds, the industry supports European growth and has a significant stabilising impact on financial markets and the wider economy in the long term.

The insurance sector is therefore very much complementary to the banking sector. We provide different products and meet distinct needs, and although we often invest in the same markets, our investment perspectives are frequently very different.

Insurers are not banks, but they also differ from other financial sector actors

One of the key differences between banks and insurers is their risk profile. The risk profile of an insurance company is fundamentally different from that of both banks and other financial markets participants. In particular, insurers have:

• an inverted production cycle where premiums are paid upfront and claims settled afterwards;
• strong and stable balance sheets where relatively illiquid liabilities are supported by a relatively liquid asset portfolio; and
• a long-term investment time horizon.

These key features enable insurers to be natural mitigators of risk who often support financial stability and who can act in a countercyclical manner. This ability to take a long-term perspective allows them to avoid being caught up in short term market movements and accentuating market turbulence.

Insurers also do not have the same crucial role as banks in payment systems and there is no equivalent “interinsurer” funding market as exists between banks, meaning there is far less risk of contagion should one insurer fail. As a result of these features, liquidity and systemic risks are typically much more limited in the insurance sector.

Given these differences, our industry has always highlighted the importance of not having read-across from the banking sector in insurance regulation. A good example of this currently being discussed is the Insurance Recovery and Resolution Directive (IRRD), which is heavily inspired by the Bank Recovery and Resolution Directive (BRRD). We are concerned that the recovery and resolution framework for insurers does not sufficiently recognise the unique features of the insurance business model, leading to unnecessary bureaucracy and costs.

European insurers are already highly regulated and supervised

Existing regulation, including the prudential regime for insurers, Solvency II, encompasses how insurers deal with customers, their solvency capital requirements and governance, and the significant information they must disclose.

European insurers have long supported the fundamentals of the Solvency II framework, including the three-pillar approach, the risk-based quantitative requirements, the alignment between business management and the regulatory framework and the inclusion of internal models. However, our industry has always made clear that changes are needed to address excessive capital and volatility, particularly for long-term business.

This is why the ongoing Solvency II review is very important. Not only does it introduce additional macroprudential supervisory tools such as supervisory powers to remedy liquidity vulnerabilities in exceptional circumstances (Article 144b), if implemented correctly it will also help to mitigate artificial volatility and reduce incentives for procyclical behaviours.

In addition to Solvency II, the International Association of Insurance Supervisors (IAIS) has developed a Financial Stability Board (FSB)-endorsed identification and monitoring framework for systemic risk in the insurance sector, called the Holistic Framework. This is widely supported by both industry and supervisors and has been in place and working well for over five years.

This high level of existing regulation and supervision means there are already extensive safeguards to protect against the limited systemic risk arising from the insurance sector.

It is crucial that insurers are viewed as distinct from other financial entities

One of the key issues for insurers with the current discussions on non-bank financial intermediation (NBFI) is the term NBFI itself. This is often very broadly defined to include anything but bank-regulated entities, from insurers and asset managers to hedge funds, money market funds, venture capitalists, the crypto ecosystem and even microloan organisations.

However, when discussing policy matters, each part of the financial sector requires a different approach. As insurers are already very well regulated and supervised, our view is that the insurance sector should be seen as a distinct category by policymakers. Indeed, given the scope and depth of the regulatory system for insurers, we often reflect that the initialism NBNIFI – non-bank, non-insurance financial intermediaries – would be a more suitable classification.

A tailored approach to the insurance industry is essential

The insurance industry is unique and more than ‘just’ a financial service provider. Insurance makes an important contribution to society through not only protecting individuals and business and supporting economic activity by spreading risk but also acting to reduce these risks through effective underwriting and mitigation initiatives. In addition, insurance helps provide access to healthcare and is an important source of long-term investment in the broader economy.

A one-size-fits-all approach to non-bank financial entities cannot support these diverse and important functions. Only regulation that is tailored to the specific features of the industry can allow it to continue to flourish.