16 January 2024
Stable, highly regulated, unique: new report explains how insurance differs to other financial industries
A new report published today details the significant differences between the insurance industry and other financial industries and why these distinctions must be taken into account by policymakers when considering future regulations.
The report by the Global Federation of Insurance Associations (GFIA) entitled “Insurance: A unique sector” explains how the insurance industry is already highly regulated with a stable long-term business model that protects people and businesses from financial hardship. The insurance industry has much less exposure to systemic and liquidity risks compared to banks and other non-banks, the report makes clear.
The insurance industry is a unique sector that is highly regulated and has a very different risk profile from banks and other financial sectors. Insurers, banks and other financial institutions have traditionally operated in the financial services industry in separate regulatory universes. However, discussions of insurance regulation among global financial regulators continue to draw heavily on the banking model, ignoring important differences between the banking and insurance business models and their risk exposures.
Susan Neely, President of GFIA, commented, “The insurance industry serves people and global economies by pooling and diversifying risks. It is highly regulated, well-capitalised and has a proven track record of effective risk management. In addition, insurers’ investments are typically long-term meaning that they are less exposed to short-term market volatility. This is what makes the insurance industry unique in comparison to other financial industries. As this new report shows, creating unjustified additional regulations that fail to recognise these differences undermines the effectiveness of insurers and their contribution to society. It will create unnecessary costs that will ultimately be passed on to consumers.’’
More recently, there have been a number of concerns raised about financial stability risks from a very broadly defined non-bank financial intermediation (NBFI) sector which are also often incorrectly projected on to the insurance industry. The NBFI sector is very diverse and includes investment and money market funds, private equity funds, venture capitalists, microloan organisations and crypto-“currencies”. Unlike insurers, many areas of the NBFI sector are not highly regulated, have limited public reporting and are highly interlinked with other areas of the financial system and real economy.
In this new report, GFIA details the significant differences between the insurance industry and other financial industries and why these distinctions must be taken into account by policymakers when considering future regulations. Importantly, GFIA explains why discussions of the regulation of the banking or NBFI sectors should not include insurance.
