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Untied to economic fluctuations, insurers are less likely to generate systemic risks 

September 8, 2016

Marcelo Ramella, LSE Business Review

In a nutshell, macroprudential regulation is made up of two building blocks: surveillance and supervision. Surveillance is concerned with identifying, assessing and monitoring the build-up of systemic risks, i.e., those regarding the financial stability of a country or region. Supervision is aimed at preventing, mitigating and managing systemic risks.

A key lesson from the recent global financial crisis is that correct understanding, timely identification and effective handling of systemic risks are absolutely critical. This requires sound conceptual frameworks, effective tools to spot and manage these risks, and competent authorities that are able -and willing- to take prompt action about them. What does this mean for insurance as a key component of the financial system? What have regulators been doing with respect to insurance-specific macroprudential regulation? What challenges lie ahead? Let’s consider these questions.

At a conceptual level, insurance-specific macroprudential regulation takes into consideration the dynamics of the business as well as the nature of its activities. Insurers cash premiums first and pay claims later. In other words, when compared to banks, it could be said that insurers do maturity transformation the other way round. Their business does not create credit, sparing a key headache for those involved in macroprudential work. Read more

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