LONDON (Reuters) – Traditional reinsurance poses no threat to global financial stability, but the industry should still be closely watched because of its peripheral involvement in potentially risky activities, regulators said on Wednesday.
"Similar to primary insurance, traditional reinsurance is unlikely to cause, or amplify, systemic risk," said Peter Braumueller, head of the International Association of Insurance Supervisors (IAIS).
The IAIS' conclusions could help reinsurers win exemption from capital charges being discussed by regulators striving to prevent a rerun of the 2008 crisis, when a series of banking failures paralyzed financial markets and slashed economic growth.
The near-collapse in 2008 of reinsurer Swiss Re and insurer AIG has convinced some that the industry should be subject to tighter controls alongside the banking sector, seen as the primary culprit in that year's financial meltdown.
Traditional reinsurers are unlikely to destabilize the wider economy if they go bust because they do not lend and typically pay out claims over an extended period, the IAIS said.
The fallout of reinsurance failures is also limited by a relative lack of interconnections within the industry, in contrast to the banking sector, where there are multiple financial links between lenders.
There have been 29 reinsurance failures worldwide since 1980, the IAIS said, generating losses of $1.8 billion, or just 0.43 percent of the premiums they took in over that period.
However, the industry's role in developing innovative and constantly evolving products which allow insurers and reinsurers to pass on some of the risk on their books to capital markets needs to be watched.
"The intrinsically global nature of the reinsurance business in general, and the evolving nature of alternative risk transfer products as well as their affinity to the financial markets, make it prudent to call for a continued monitoring of the reinsurance sector," the IAIS said.
The IAIS also warned that underwriting credit default swaps – a form of insurance against borrowers failing to repay – created "a considerable degree of systemic risk", although it noted that reinsurers had sharply reduced their presence in the CDS market since 2008.
AIG and Swiss Re's financial problems three years ago were blamed on their heavy exposure to credit default swaps underwritten by specialized subsidiaries.
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