Risk Management

IMF Urges ‘Increased Vigilance’ Over Insurers

The sector's increased contribution to systemic risk necessitates a "more macroprudential approach" to regulating it, the IMF says.
Matthew HellerApril 5, 2016

The International Monetary Fund has called on financial regulators to beef up their oversight of the insurance industry, warning that life insurers in particular are becoming a source of systemic risk.

The IMF’s latest Global Financial Stability report did not refer specifically to the controversy in the United States, where a judge last week struck down the designation of MetLife, one of the largest U.S. insurers, as a “systemically important financial institution” subject to increased regulatory supervision.

In the wake of the ruling, MetLife’s two biggest competitors, Prudential Financial and American International Group, are expected to challenge their “too big to fail” labels.

But the IMF called for “increased vigilance” over the insurance sector, saying regulators should do more to mitigate the risks posed by large and small insurance companies.

“Across advanced economies the contribution of life insurers to systemic risk has increased in recent years,” the report said, noting that the sector’s common exposures to aggregate risk have grown, in part due a rise in insurers’ interest rate sensitivity.

The IMF recommended that regulators, should take a “more macroprudential approach” to the sector that goes “beyond the solvency and contagion risks of individual firms and take[s] on the systemic risk arising from common exposures.”

Most fundamentally, the IMF said, an international capital standard for insurance companies is needed to mitigate systemic risk and protect against cross-sectoral and regional spillovers. The International Association of Insurance Supervisors has issued a consultation paper on such a standard and created a framework to identify carriers as systemically important.

Regulators should also pay attention to smaller and weaker firms, the fund said, because those carriers “are most likely to take on excessive risks — and the solvency problems of smaller entities may result in cascading effects that become systemic.”

Insurers have longer-term liabilities than banks, greater diversifica­tion of assets, and less extensive interconnections with the rest of the financial system. But the the near-collapse of AIG during the 2007-09 financial crisis raised concerns about the sector’s systemic risk contribution.

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