A proposed new approach for identifying and containing international systemic risk in the insurance industry isnt fit for the purpose, Insurance Europe said today.
The trade body was responding to a consultation launched by the International Association of Insurance Supervisors on a methodology for identifying systematically risky insurers across the globe.
It criticised the IAIS, which sets global insurance standards, for following an approach based on that used for supervising the global banking system, despite having stated that there is little evidence of traditional insurance generating or amplifying systemic risk within the financial system or economy.
Michaela Koller, director general of Insurance Europe, said: 'We are disappointed that the approach proposed by the IAIS does not adequately reflect the fact that the banking and insurance business models can have a very different impact on economic and financial stability.
'The methodology developed by the Basel Committee for banking does not work for insurance. The limited adjustments that have been made to it by the IAIS are not sufficient to reflect the existing structural differences between the two sectors.'
In particular, Insurance Europe said the indicator-based approach developed by the Basel Committee, which uses criteria and indicators such as size and global reach, does not reflect systemic risk in insurance.
As an alternative, it called for a two-step process for identifying and managing system risk in insurance. The first step would be to identify insurers involved in potentially systemically risky activities and to assess those activities. The second would be to then apply measures to target those activities while also taking account of any mitigating factors and existing legislation.
When indicators are used, insurers' figures for a specific risk should be compared to those for the whole financial sector and not just for insurance companies, it said.
'This would better address the fundamental purpose of the methodology, which is to identify insurers whose distress could potentially disrupt the global financial system, not those that have a larger presence than other insurers in a particular area,' Ms Koller added.