NU Online News Service, Aug. 18, 2:01 p.m.EDT

The Institute of International Finance says regulators need tocoordinate development of reforms affecting the banking andinsurance industries to avoid unintended consequences.

In a report released yesterday titled, “The Implications ofFinancial Regulatory Reform for the Insurance Industry,” theassociation says failing to understand the differences between thebanking and insurance industry and not coordinating development ofregulations could have “profound implications” for bothindustries.

Failure to coordinate could lead regulators to “make unwarrantedassumptions about how regulatory reform will operate inpractice.”

“Uncoordinated reforms will be less effective in promotingfinancial stability and will undermine the ability of insurers andbanks to undertake their core functions in supporting economicactivity and recovery,” says Walter Kielholz, IFF working groupchairman and chairman of Swiss Re Ltd.

“At a time of important regulatory change, policy makers need tounderstand how the insurance and banking sectors will interactunder the new regulatory regimes,” he adds.

The report, produced in collaboration with Oliver Wyman, notesthat as Europe develops Solvency II for implementation in 2013, theBasal Committee on Banking Supervision and the European Insuranceand Occupational Pensions Authority have released resultsillustrating the impact of new regulations. However, both reportswere developed independently of one another and do not examine whatimpact the new measures will have on one another's sector.

Among some issues the report points to:

• There are incentives in Europe for insurers to shorten thematurity of insurer's corporate bond holdings. But such a move “mayrun counter to the precepts of good risk management andasset—liability management principals by encouraging insurers toshorten the tenor of their asset portfolios while their cash-flowprofiles remain generally long-term.”

• Incentives to take on more sovereign debt holdings, whilegiven the current instability in several government bond markets,such a move “may be questionable.”

• Banks will need to raise $750 billion of capital to meetSolvency II requirements, and assumptions are made that theinsurance sector would be a ready market for providing new capitaland funding, says IIF Managing Director Charles Dallara. He addsthat such an assumption “may be overstated.”

“The willingness and ability of the insurance sector to providea ready market for new capital and funding may be quite limited,”says Axel Lehman, a member of the IFF working group and group chiefrisk officer and member of the executive committee of ZurichFinancial Services.

“Even if insurers were willing to increase their exposure tobank assets in the form of debt, new insurance regulation and soundrisk management will tend to mitigate against any further increase,particularly of long term funding,” he says. “Bank debt alreadymakes up a significant portion of insurers' portfolios.”

Lehman went on to say the industry “fully supports strongerregulatory standards,” but that regulation needs to strengthen thefinancial system.