Insurance markets play a key role in the pooling, management, and transfer of risks in the economy and, in some countries, increasingly play a role in the long-term savings and retirement incomes of individuals. The financial crisis highlighted the linkages of the insurance sector with the financial system and the broader economy.
The financial turmoil, which started with the sub-prime mortgage crisis in the United States and whose effects clearly became global in mid-2007 with the collapse of several large international hedge funds and the near-collapse of a major industrial bank in Germany, followed by the breakdown of interbank lending markets in August 2007, has had important, continued impacts on the economy, including the insurance sector. Events took a turn for the worse when, during the second half of 2008, the crisis exploded into a global credit crunch following the collapse of major global financial institutions. The ensuing recession officially became, by April 2009, the second longest since the Great Depression. Following a fall of 2.1% in the first quarter of 2009, gross domestic product in the OECD area stabilised in the second and third quarters according to preliminary estimates.
Impact of the Financial Turmoil
The insurance sector played an important supporting role in the financial crisis by virtue of the role played by financial guarantee insurance in wrapping, and elevating the credit standing of, complex structured products and thus making these products more attractive to investors and globally ubiquitous.1 In addition, the narrowly avoided collapse of AIG Incorporated (AIG Inc.), viewed by some as the world’s largest insurance group consisting of a global financial service holding company with 71 U.S. based insurance companies and 176 other financial service companies, contributed to the severity of the market turmoil in September 2008. Furthermore, growing corporate insolvencies and a negative credit watch outlook caused important dislocation and retrenchment in trade credit insurance markets, which added considerable stress to business-to-business transactions and increased liquidity pressures on firms in an already liquidity-stressed environment, and thus aggravating the effects of the economic crisis.
Governmental and Supervisory Responses to the Crisis in the Insurance Sector
Public authorities, at the outset of the crisis in mid-2007, focused on the liquidity positions of banking institutions given the remarkable and unprecedented seizure of international interbank lending markets in August 2007 and the sudden high risk aversion displayed by capital markets toward banking institutions due to concerns about bank exposures to sub-prime mortgage assets and the ability of some banks to manage their funding and liquidity risks. Central banks responded with the provision of large amounts of liquidity to the banking system.
Key Policy and Regulatory Issues in the Insurance Sector
The financial crisis and related governmental responses have served to identify a number of policy and regulatory issues. Some of these issues have been captured by the Financial Stability Board (FSB); however, additional issues require consideration. In identifying policy implications or issues for the insurance sector, consideration should be given to the fact that the business model for insurance companies is, despite convergence between the banking and insurance sectors, generally distinct from those of banks and that the insurance sector has, overall, fared the crisis relatively well considering the extreme systemic stress events that occurred in 2008. That said, the financial crisis has raised issues that are common across the financial sector. The key policy and regulatory issues of relevance to the insurance sector include...
Key Policy Conclusions from the Crisis
The OECD Insurance and Private Pensions Committee has, on several occasions, discussed the issues raised by the financial crisis and considers that it is important to draw some key policy conclusions from the crisis and its impact on the insurance sector in order to provide further impetus to financial sector reform. These policy conclusions are aimed at promoting financial stability, enhancing the protection of policy holders, and ensuring a level and competitive playing field. The conclusions are the following...
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