The contrasting business models and balance sheet structures of insurers and banks mean that the banking model of capital cannot be applied to insurance, writes Christian Thimann.
Regulation of the insurance industry is entering a new era. The global regulatory community under the auspices of the Financial Stability Board (FSB) is contemplating regulatory standards for insurance groups that it deems to be of systemic importance. Nine insurance groups received this FSB classification in 2013, and the design of systemic regulation for these groups is now in progress.
The framework that the FSB has rolled out for systemically important insurers is virtually identical to its framework for systemically important banks. The identification criteria are largely the same, and so are the envisaged policy measures: enhanced group-wide supervision, preparation of crisis management tools, and possibly higher capital charges for some activities.
The current regulatory approach is not yet sufficiently taking account of the fact that insurance companies have a fundamentally different business model and interact with each other and the financial system in a way that is very different from banks. Prudential regulations for the two sectors (Basel III versus Solvency II or the US risk-based capital framework) are entirely different, and confirm the need to adapt rules to the fundamental differences between the two sectors.
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