Towards a sustainable regulatory regime
01 Feb 2010
Two major issues stem from the complexity of the modern world: industry and companies are much more globalised, and emerging markets are playing a much more important role.
Swiss Re: What has the insurance regulatory community learnt from the financial crisis?
Yoshihiro Kawai: The crisis itself was triggered by the banking sector. Insurance is very different to banking, and we should understand the specificity of insurance.
What we have learnt is that within financial conglomerates, where insurance companies operate with other financial businesses, such as hedge funds, or CDS-type unregulated products, it doesn’t matter how good the insurance business is, it can be considerably damaged by other businesses within the group. We learnt that we have to view the big picture when we regulate insurance companies themselves, so we don’t only examine the pure insurance business, but other financial sector linkages.
Also, to some extent we learned in early 2000 crisis, more specifically about insurance: we should think carefully about what our role as an institutional investor should be in creating governance structures for the capital markets as a whole, and the bigger issues surrounding the operation of markets.
Swiss Re: How did the IAIS respond to the crisis?
Yoshihiro Kawai: In October 2008, when the crisis was at its climax, we had many coordination meetings – we were in the middle of the various regulatory stakeholders in the insurance markets, and between the financial stability bodies and central banks, and we purposefully established focused collaboration around that moment.
We discussed how our members should deal with the supervision of financial markets groups, how we ourselves could organise international coordination, exchange information, and how we can coordinate between supervisors. We discussed how we could improve our transparency of risk management, taking into account for example the pro-cyclical nature of the industry. So we identified some key issues, and set in train a programme of follow ups. That was in October last year.
And then G20 and Financial Stability Board, this more high level coordination takes much more initiative, so we work closely with them in line with what we are doing.
We regularly reviewed what we should do, particularly lessons learned about what we should do through this crisis, we work closely with our banking colleagues, securities colleagues, financial stability colleagues and so on. In short what we did was identify those issues such as solvency and coordination among ourselves and also coordination with other financial sector regulators, and we constantly updated what we should do.
Swiss Re: What next, how will the role of the IAIS develop in coming years?
Yoshihiro Kawai: That is also an issue that we have been discussing very seriously, we are establishing a foundation for creating very high-level standards, and for having an impact on each national regulator, and to create a level playing field. The next step is to deal with two major issues stemming from the complexity of the twenty-first century world: the industry and companies are much more globalised, and emerging markets are playing a much more important role.
We see that we need concrete standards, not just high-level but concrete and visible or tangible standards that all supervisors around the world should implement. We want to enhance more conversations with authorities globally with regards the regulatory field , laying the foundation for the convergence of regulatory systems.
Swiss Re: When you talk about coordination and recognition between regulatory authorities, do you think that is more advanced in the world of reinsurance over insurance?
Yoshihiro Kawai: That may be the case, but there is still a long way to go. Mutual recognition is at different stages – for example if at first some host jurisdictions recognise other home country supervisory authorities, and don’t therefore require they hold specific information on some supervised entities, that is a very basic level of recognition. At higher stages of recognition, the host jurisdiction may completely rely on the home jurisdiction’s regulatory approach. Of course there are many intermediary stages. We try to reach as much as possible for the highest level of recognition, but the precondition for that is that the host jurisdiction trusts the home jurisdiction’s authorities.
Naturally the reinsurance industry is much more global and has had this discussion much more effectively than the primary insurance markets. And hopefully they can promote the concept more promptly than primary insurance market.
Swiss Re: Do you see that the insurance solvency regime will converge around the world, and if so, what sort of model will it gravitate towards?
Yoshihiro Kawai: This is also an issue that is constantly under discussion. Again now accounting regimes are converging, for instance, on the insurance liability side, the IASB will hopefully reach agreement on the insurance contract liabilities assessment side in the future.
Businesses such as Swiss Re are very global, and jurisdictions need to communicate much more closely. Because regulators currently speak completely different languages and communication between them is very cumbersome. In the end it costs the policyholder, so we hope that we can reach better levels of convergence on solvency, and as concrete as possible. It is easy to say but it is a matter of agreement between our members.
Swiss Re: If you consider the GFC, and as you said, its not just a matter of regulating insurance but managing the interconnectedness between all the financial markets, what will success look like in 3 or five years in terms of getting us closer to a perfect insurance regulatory system?
Yoshihiro Kawai: First of all, because of interconnectedness, in 3 years time, hopefully we can have much closer coordination with our banking colleagues, our financial stability colleagues, our security colleagues, and central banking colleagues. And hopefully there will be no gap as we have seen such as unregulated products in the CDES and CDO markets. As we have seen, if there is a gap it can create a huge mess. So we would hope that there would be no holes through the system, and hopefully again coming back to ourselves we have more concrete standards for ourselves so we can contribute more to a better level of convergence, a better regulation system globally and authorities in different jurisdictions can recognise each other in a much more efficient way.
Interview by Tim Dickenson at the NORIS conference, Helsinki, August 2009
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