Supervisory challenges in the presence of systemic risk: The IAIS response to the current financial crisis

Abstract

The current financial crisis has called for a reassessment of financial sector supervision. On top of the agenda is the identification of those institutions whose failure could cause systemic cascade effects with adverse impacts for the whole financial system and the real economy. These institutions will be subjected to higher capital requirement, intensified supervisory scrutiny and pre-defined resolution regimes. The IAIS as the global standard setter for insurance supervision has taken up these challenges and responded swiftly and comprehensively. The association developed the theoretical foundations to assess insurers in the context of financial stability, the methodology to identify systemically important insurers with global reach, policy measures, to appropriately deal with insurers deemed to be systemically relevant and a framework for macroprudential policy and surveillance. In all areas the IAIS navigated in uncharted waters, developing methodologies, policies and frameworks from scratch, while ensuring that the specifics of both the insurance business model and the insurance balance sheet were properly reflected. The challenges must also be taken up by financial firms. Risk management will have to broaden its scope to capture the build-up of system-wide risk that might endanger the viability of individual institutions.