Insurance Sector's Systemic Risk Is Moderate, Though Trending Higher

Though systemic risk in the global insurance sector is trending upwards, it remains moderate and is low relative to that of the banking sector, according to an analysis by the International Association of Insurance Supervisors (IAIS).

In its December 2022 Global Insurance Market Report, the IAIS outlined key findings from its 2022 Global Monitoring Exercise (GME). The GME builds on data collected from approximately 60 of the largest international insurance groups and aggregate sector-wide data from supervisors around the world, covering more than 90 percent of global written premiums.

"Through the GME, the IAIS monitors global insurance market trends and developments, detects the possible build-up of systemic risk, and facilitates a collective discussion on the appropriate supervisory response at the sectoral and individual insurer level," Vicky Saporta, IAIS executive committee chair, said in a statement.

The IAIS said the insurance sector's trend toward higher total systemic risk scores is driven by increased exposures to illiquid and difficult-to-value assets, over-the-counter derivatives, short-term funding, and intrafinancial assets (including reinsurance). "This contributes to potential vulnerabilities for the insurance sector, notably in the face of rapidly increasing interest rates," the IAIS said.

While the overall credit quality of insurers' assets is high, their exposure to below-investment-grade assets has increased, the IAIS said.

The report also noted that during 2022 several macrofactors created uncertainty for the insurance industry, including geopolitical conflict, inflation, tightening monetary policy, and a deteriorating economic outlook that has increased market, credit, and liquidity risks.

The IAIS cited several measures undertaken by insurers to preserve or improve profitability, including optimizing capital allocation and asset-liability management, realizing gains on investments, digital transformation, diversifying product offerings and revenue sources, and optimizing underwriting and pricing policies.