2. Alternative Risk Transfer and Insurance-Linked Securities.
B. Gales (University of Groningen).email@example.com
Risk sharing is the essence of insurance, but insurance institutions itself are fragile and thus risky. Insuring can create problems, but also the investment activities which go with insuring. Looking at the past, insurers were convinced during mid-eighties that major problems would come to insurance via the assets side of the balance, if at all. Till today, academic literature qualifies the risks of insurance runs and fire sales of assets as unlikely. Such runs and sales signal, what is nowadays called systematic risk. This may be true, but is a non-life perspective. In life insurance, matching long-term liabilities with short-term assets can be a major aspect of systemic risk, exposing insurers to interest rate fluctuations. Investment strategies can and should solve the problem of a mismatch of maturities. In the end, much literature assesses the contribution of insurance to systemic risk as small. Smaller, at least, than the contribution of banking. The assumption is also based upon the assumption that market discipline is in the case of insurance is particularly strong. Market participants monitoring closely insurance companies explain why few bankruptcies occur. This then is an argument for limiting supervision by authorities, the more in combination with the “biting-back vision” that regulation itself induces less market discipline. Even authors like Eling and Pankoke, who are skeptical, conclude also that traditional insurance activities do not contribute to systemic risk. Traditional is an important qualifier.
By now we have officially recovered from the financial crisis of 2008. Mergers and acquisitions and foremost the integration of banking and insuring made it not easy to distinguish the role of banking and insurance in the financial depression and even less easy to draw lessons for governance and supervision. The debate whether supervision of banking and insuring (and in social security) should be similar or specific continued and continues. It, however, is clear that also insurers were involved in what happened after the collapse of Lehman Brothers and fall of AIG. In the Netherlands, for example, major banks and insurers, both composite offices as specialized insurers, had to be bailed out. On a global scale it was true that the contribution of insurers to systematic risk was small, but nevertheless, the contribution of insurers to the fragility of the financial system peaked also around the financial crisis of 2008. The problems of 2008 do remind of the shocks of the interwar period. In some countries, the early 1920s saw both insurance companies and banking companies experience major problems, elsewhere a financial crisis accompanies the onset of the Big Depression. The unrest of the interwar years stimulated the introduction of supervision or of modernized regulation. The role of the state in the financial sector had been a matter of debate for some time. The problems of the early twentieth century caused a shift in the regime of supervision in liberal environments.
The ambition of this session is to discuss governance and supervision of the financial sector in the long run and contrast recent experience and today’s differences of opinion with the historical record. Major crises are low probability events. That does not imply that governance or supervision itself are low probability events or cannot cope with these. The test is rare. Despite the theoretical notion of active monitoring by stake holders, the industry is not fully transparent for outsiders and these have to thrust the business both daily and in special circumstances. Thrust might have become increasingly and difficult with the growth in scale and blurring of barriers between domains due to integrating businesses. For the session it might be especially interesting to look cases of mobilization of the insured or savers and consider the interaction with the design of internal and external supervision. Furthermore, both the culture of governance – the norms and values glueing consumers, intermediaries and firms – and the design of financial supervision by authorities are very pathdependent. For purposes of comparison, Masciandaro constructed two indices, producing surprising, perhaps telling outcomes. For example, the Netherlands is a remarkable outlier relative to Belgium or northern Europe overall and is classified close to southern Europe.
All these aspects make it interesting (1) to compare regimes of supervision and governance over time and (2) to compare differences between countries in order (3) to understand designs and the changes of design. A focus upon stress might be extra valuable (4) to understand change under duress, thus design under special conditions. Stress can be seen as major upheavals, bankruptcies or insolvencies, but also institutional frictions involving intermediaries. It is also interesting (5) to have a financial sector perspective and to look, at least at the level of the session, not only at insurance companies – in itself covering already distinct fields – but also pension funds and banks.
 M. Eling, D.A. Pankoke, Systemic Risk in the Insurance sector. A Review and Directions for Future Research, in: Risk Management and Insurance Review 35, 1 (2016), 9-34.
 Ch. Bierth, F. Irresberger, G.N.F. Weiß, Systemic risk of insurers around the globe, in: Journal of Banking and Finance 55 (2015), 232-245.
 C. O’Brien, Insurance Regulation and the Global Financial Crisis. A Problem of Low Probability Events, in: Geneva Papers on Risk and Insurance 35 1, (2010), 35-52.
 D. Masciandaro, E Pluribus Unum? Authorities’Design in Financial Supervision. Trends and Determinants, in: Open Economies Review 17, 1 (2006), 78.
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