Insurance companies more dangerous to the economy than ever, IMF says

Insurance companies more dangerous to the economy than ever, IMF says | Insurance Business America

Insurance companies more dangerous to the economy than ever, IMF says
An international body is urging greater regulation on insurance companies, arguing that carriers pose a greater risk to the global financial system now than they did before the financial crisis.

In a new report, the International Monetary Fund suggests that insurers – particularly life insurers – play an increasingly prominent role in the economy and as such, as susceptible to financial risks. Accepting that, the group recommends that governments consider a closer watch and greater regulation on those firms.

Specifically, the upcoming Global Financial Stability Report points out that insurers guaranteeing a minimum level of return on some products are in an inherently risky position. Insurers are also susceptible to fluctuations in the global economy such as the period of low interest rates in the US and Europe.

As long as the low interest rate environment remains, the IMF argues, insurance companies are at greater risk of being brought down by economic shocks and may not be able to fulfill their role as risk transfer mechanisms.

Concluding the report, the international body called on government regulators to heighten their influence with the industry. Regulators should not just look at companies singularly but at the industry as a whole with greater capital and transparency standards.

“Insurance supervisors should fill the gap by enhancing both micro- and macroprudential supervision of weaker and smaller firms,” the report said, noting that firms with lower capital ratios seem to be taking more risk.

“Their profitability remains under pressure, and they seem to have become more susceptible to a search for yield in the current low-interest-rate environment.”

This warning comes days too late for the US government. Last Wednesday, a US judge ruled that federal insurance regulators did not have the right to label MetLife as “systemically significant,” making it subject to capital standards similar to those of the country’s largest banks.

In the wake of the ruling, other large insurers – Prudential and American International Group – are considering challenging their SIFI label as well.

MetLife’s successful suit argued that its business did not pose a threat to the US financial syste, making its SIFI designation inappropriate.

Insurance companies have long argued that the industry is inherently different from the banking industry and noticeably less susceptible economic risk, making standards imposed in the Dodd-Frank Act inappropriate for the industry.