Macro-Prudential Approaches: Monitoring the Insurance Sector
Observations from Global Financial Stability Reports and the NAIC toolbox
December 2016, Presentation to NAIC Financial Stability (EX) Task Force
Geneva Association: Insurance sector investments and their impact on financial stability
December 2016, Presentation to NAIC Financial Stability (EX) Task Force
Monitoring Interest Rate Risk, Lower Interest Rate Study Update
April 2016, Presentation to NAIC Financial Stability (EX) Task Force
IAIS Releases 2015 Global Insurance Market Report
March 2016, CIPR Newsletter
Macroprudential Policy and Surveillance (MPS) in Insurance
(By Edward Toy, MPSSC Chair and NAIC Capital Markets Director, and Sebastian von Dahlen, IAIS Economic Counsellor)
August 2013, IAIS Newsletter
Macroprudential Surveillance in the Insurance Sector, A Challenge Brought to the Fore by the Financial Crisis
December 2012, IAIS Newsletter
The Emerging Role of Macroprudential Surveillance in Insurance Supervision
October 2011, CIPR Newsletter
Systemic Risk and the U.S. Insurance Sector
February 2010, Mary A. Weiss, Ph.D., CIPR Distinguished Scholar
The Financial Crisis, Systemic Risk, and the Future of Insurance Regulation
September 2009, Scott E. Harrington, Ph.D. (Posted with permission from the National Association of Mutual Insurance Companies)
Last Updated 12/21/17
Issue: The financial system has become more interconnected and complex than ever before, making the impact of a crisis, in turn, greater than ever. As the 2008 global financial crisis unfolded, stress in one institution spread quickly to related institutions, across sectors and across jurisdictions, creating systemic issues. The financial crisis showed that microprudential supervision alone was not enough to sustain the stability of the financial system. A more comprehensive macroprudential approach, which goes beyond supervision at the individual firm level, is needed to look at broad market and economic factors that could have a material impact on the insurance industry as whole or significant segments.
Overview: In early 2011, in response to the 2007-2008 financial crisis, the International Association of Insurance Supervisors (IAIS) created the Macroprudential Policy and Surveillance Working Group, now the Macroprudential Policy and Surveillance Subcommittee (MPSSC) under the Financial Stability Committee (FSC). The MPSSC is tasked with developing a framework for implementing macroprudential policy and surveillance (MPS) in the insurance sector, including the development and enhancement of supervisory capacity to “identify, assess and mitigate macro-financial vulnerabilities in areas of economic significance to the global insurance sector where the impact of distributions to financial stability are deemed most severe and wide-spread.”
According to the IAIS, the primary objective of MPS is to limit systemic risks with the goal of maintaining financial stability and minimizing the incidence and impact of disruptions in the provision of key financial products and services that can have adverse consequences for the real economy and broader implications for economic growth. The IAIS notes that macroprudential surveillance is predicated on: (i) the assessment of system-wide vulnerabilities and the accurate identification of threats arising from the build-up and unwinding of financial imbalances; (ii) shared exposures to macro-financial shocks; and (iii) possible contagion or spillover effects from individual institutions and markets due to direct or indirect connectedness.
The IAIS is also working with the Financial Stability Board (FSB) to identify global systemically important financial institutions (G-SIFIs). The IAIS has developed an initial assessment methodology to identify any insurers whose distress or disorderly failure, because of their size, complexity and interconnectedness, would cause significant disruption to the global financial system and economic activity. Any such insurers should be regarded as systemically important on a global basis. In parallel to the work toward identifying potential G-SIIs, the IAIS has developed a framework for Macroprudential Policy and Surveillance in insurance. This work builds on the foundation laid down in the Insurance Core Principles (ICPs) approved in October 2011, and in particular on ICP 24, which provides the principles and standards for MPS to be implemented by supervisors.
In addition, the IAIS releases a Global Insurance Market Report (GIMAR) annually and produces a Key Insurance Risk and Trends Survey (KIRT) that is sent to all IAIS members. The GIMAR a collects and reports data reflecting the performance of primary insurers and reinsurers as well as key developments in the global insurance market from a supervisory perspective, focusing on the recent performance of the sector as well as key risks faced by it. The GIMAR is data-driven and does not carry normative statements on supervisory issues. It is not intended to reflect the views of IAIS Members and is neither an official policy paper nor an application paper. The most recent 2016 GIMAR shows that, while continuing to remain well-functioning and stable, the (re)insurance sector operates in an increasingly difficult macroeconomic and financial environment characterized by weak global demand, low inflation rates, very low interest rates, and bursts of financial market volatility. The report can be found here.
Status: The NAIC plays an active role in macroprudential surveillance in the insurance industry. Various committees, task forces, and workings groups are charged with oversight and maintenance of specific segments of the U.S. solvency framework of regulation. These surveillance efforts include reviewing the performance of insurers with the goal of identifying industry-wide trends of significance and concern. The NAIC Financial Data Repository (FDR) database allows regulators to monitor the performance of the industry and identify concerns for further investigation. The NAIC Financial Regulatory Services Division utilizes the FDR to perform quarterly analyses and reports that summarize the operating performance of each of the major insurance sectors. Such analyses help identify macro-level risks and enhance the regulators ability to consider an appropriate response to risks at a microprudential level.
The NAIC’s Capital Markets Bureau is charged to support state insurance departments and other NAIC staff on matters affecting the regulation of investment activities at state regulated insurance companies. The Capital Markets Bureau supports the Financial Regulatory Services Division to identify potentially troubled insurers and market trends that may have a material impact on the investment profile of the insurance industry. Edward Toy, Director of the NAIC Capital Markets Bureau, is the Chair of the MPSSC.Furthermore, the NAIC recently formed the Financial Stability (EX) Task Force to consider issues concerning domestic or global financial stability as they pertain to the role of state insurance regulators. The Task Force serves as a forum to coordinate state insurance regulators' perspective on a wide variety of issues arising from the designation of U.S. insurance groups as “systemically important” both pre and post designation.