GFIA & RAB

GFIA OPINION: INDUSTRY'S ROLE IN SOCIETY

Insurance: A Unique Sector

A long and well-documented track record of effective risk management

Insurers play a unique role among financial services industries. Their ability to manage risk protects people, organisations and global economies from catastrophes that would otherwise be devastating. Each day around the world, insurers are leveraging what makes them unique to provide peace of mind and financial security to millions of policyholders. Their long and well-documented track record of effective risk management is without question.

As a report last year from the Global Federation of Insurance Associations (GFIA) showed, the need for the unique protection insurers offer has never been greater. In four areas — natural catastrophe, pensions, cyber, and health — the gap between the protection people and organisations have versus what they need exceeds USD 2 trillion.

Closing these gaps may seem like a daunting task, but as the report showed, it is not impossible. By working together, insurers and policymakers can make great progress on mitigating these risks. The report offered a roadmap that – at the very least – provides a starting point for meaningful dialogue, and ultimately will serve to advance real policy solutions that increase access to insurance products and services.

GFIA’s members look forward to working with our global partners and supervisors to help address these gaps. But as a new report published by GFIA this January shows, there’s another challenge that could hinder these efforts: improper regulations.

Improper regulations

Too often insurers are lumped together with banks and other financial institutions by global regulators, with negative consequences for the industry and consumers. GFIA’s report titled “Insurance: A unique sector”, highlights the important distinctions between insurance and other financial sectors. It also details how the insurance industry is truly unique and the potential harm of regulations that fail to recognise these important distinctions.

As the new report makes clear, the insurance industry’s risk profile differs greatly from banks and other financial sectors. Traditionally, insurers, banks and other financial institutions have been overseen by separate regulatory regimes. However, discussions of insurance regulation among global financial regulators continue to draw heavily on the banking model, disregarding key differences between the business models and risk exposures of insurers and banks.

“The need for the unique protection insurers offer has never been greater.”

The timing of this report is no coincidence. International bodies like the Organisation for Economic Co-operation and Development (OECD), the International Association of Insurance Supervisors (IAIS), and the Financial Stability Board (FSB) are actively considering new regulations for the financial services sector. Regulators and standard-setters are reviewing financial stability risks arising from the non-bank financial intermediation (NBFI) sector, which is broadly defined to include industries such as investment and money market funds, private equity funds, venture capitalists, microloan organisations, and cryptocurrencies.

With this report, GFIA is sending a strong message: discussions of new regulatory proposals should not tie the insurance industry in with the banking, NBFI or other non-insurance sectors. Creating unjustified, additional regulations that fail to recognise these differences undermines insurers’ effectiveness and their contribution to society. It will create unnecessary costs that ultimately will be passed on to consumers.

Liquidity risk is rarely an issue and system risk is low

To be sure, insurers are already subject to comprehensive regulations. Existing rules require insurers to maintain adequate capital, manage risks effectively, treat customers fairly and uphold robust internal governance. These appropriate regulations take into consideration important features that make the insurance sector unique. Its liabilities are fully funded. It does not borrow to fund policyholder claims. Liquidity risk is rarely an issue and systemic risk is low.

Global supervisors strictly enforce these rules and act expediently to correct any threat to insurers or policyholders.

The insurance industry serves people and global economies by pooling and diversifying risks, which can reduce financial uncertainty and make any losses more manageable. It is what enables insurers to guard against financial loss due to floods, fire, the death of a family breadwinner or other unforeseeable disasters.

In addition, insurers’ investments are typically long-term, making them less exposed to short-term market volatility. These long-term investments allow insurers to pay consumers’ claims when accidents or tragedies occur – whether it’s next week, next year or decades from now.

The insurance industry’s promise to pay consumers’ claims following a tragedy is more than just a contractual obligation. It is a solemn promise to be there when we are needed most.

Like our 2023 report, the ‘Unique Sector’ report will contribute to our ongoing dialogue with global supervisors and thought leaders. It will be an important tool for us as we educate world leaders about our industry and engage with them on solutions that will help the people we both serve.