Insurance sector proves resilient amid global uncertainty

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The insurance sector has demonstrated resilience and stability, maintaining robust performance and effective risk management despite ongoing global challenges and uncertainties.

Last week, the International Association of Insurance Supervisors (IAIS) released its 2024 Global Insurance Market Report (GIMAR). The report presents findings from the IAIS’s annual global monitoring exercise (GME), a framework designed to identify key risks, monitor trends, and assess the potential for systemic risks within the global insurance sector.

According to Shigeru Ariizumi, the chairperson of the IAIS’s executive committee, the analysis underscores the industry’s strength in navigating uncertainties.

At the end of 2023, insurers reported an increase in total assets, along with stable solvency and profitability levels, bolstered by strong underwriting performance and investment returns. Liquidity positions also improved slightly, as insurers maintained a focus on building adequate liquidity buffers.

However, the systemic risk score for insurers participating in the GME increased by 5.3% compared to 2022. This rise was largely attributed to a notable increase in level 3 assets –illiquid and hard-to-value investments. The shift was primarily driven by accounting changes under International Financial Reporting Standards (IFRS) 9 and 17, which reclassified certain assets, including mortgages, from amortised cost to fair value.

In response to these developments, the IAIS is revisiting its risk assessment tools. “Following these changes, the IAIS is considering updating the level 3 assets indicator in the 2025 triennial assessment review and is developing an ancillary indicator to enhance risk assessment of mark-to-model assets,” the organisation stated.

Despite the increase in systemic risk scores, the report concludes that insurers’ systemic risk remains significantly lower than that of banks.

Top risks for insurance supervisors

At the IAIS annual conference in Cape Town last week, Dieter Hendrickx, the chairperson of the IAIS’s macroprudential committee, addressed the risks facing the insurance sector. Speaking during a panel discussion on risks in the global insurance sector, Hendrickx outlined findings from the GIMAR and shed light on pressing themes.

Hendrickx detailed several risks that remain top priorities for insurance supervisors:

  • Surrender risk: Rising interest rates could lead policyholders to surrender life insurance products in search of better returns elsewhere.
  • Debt sustainability: Fixed-income assets dominate insurance portfolios, but historically high corporate and sovereign debt levels could heighten vulnerabilities. Volatile interest rates and inverted yield curves also present challenges for asset-liability management (ALM).
  • Commercial real estate (CRE) exposures: Although modest on average, CRE exposures could result in impairments or indirect risks if market downturns destabilize economic sectors.
  • Derivatives and margin calls: Although derivatives are widely used to hedge risks, margin calls during periods of high market volatility may exacerbate liquidity risks.
  • Artificial intelligence and digitalisation risks: Innovations such as AI offer operational benefits but introduce challenges, including cyber risks, easier surrenders, and complexities in underwriting and asset management.
  • Geopolitical risks: Hendrickx emphasised how geopolitical events could affect investment returns, solvency, and liquidity, while also increasing claims due to inflation and operational disruptions.

Growing volatility as global financial system becomes more interconnected

As the financial landscape grows more interconnected, panellist Andrea Maechler, the deputy general manager of the Bank for International Settlements (BIS), highlighted both the opportunities and vulnerabilities shaping global financial stability. Among these were market volatility, and the evolving dynamics of asset ownership.

The BIS, headquartered in Basel, Switzerland, serves as a banking institution for central banks and international organisations. It is owned and governed by 63 central banks, representing about 95% of global GDP.

“The financial market has become much more interconnected over the last 10 years,” Maechler noted, reflecting on the significant changes that have reshaped the global economic order. Although inflation – a major concern over the past few years – has begun to recede, she praised the resilience of the global economy amid the most synchronised monetary tightening cycle in decades.

“It is amazing how the global economy continues to really be on broad course,” she said.

However, Maechler cautioned against complacency. One pressing short-term concern is the growing divergence between low market volatility and heightened uncertainty in economic growth and geopolitical risks.

“There’s this gap right now… and it’s something really to monitor very closely,” she warned.

Delving into broader trends, Maechler pointed to the tremendous growth in global financial assets over the past 15 years, alongside a significant shift in who holds these assets. Traditional banking institutions now play a smaller role, with institutional investors such as life insurers, investment funds, and hedge funds increasingly dominating.

“With new assets comes [the question of] where do you invest those assets,” she explained, noting the increasing push toward private markets and emerging opportunities. However, she highlighted a disconnect: although the volume of assets has surged, the investable universe remains relatively narrow, concentrated primarily in the United States, Europe, and other advanced economies, with limited diversification into emerging markets such as China or India.

This concentration, Maechler said, exacerbates the risks of market shocks.

“Whenever you see a shock, [there’s] much higher volatility, much higher reversals of flow, with, of course, the usual impact on liquidity… something that we all have to look into.”

On geopolitical risks, Maechler underscored the compounded challenges posed by limited diversification opportunities across markets and currencies.

“The risk of having much more volatility just because of [the] volume of financial assets moving around in reaction to a shock can be much larger,” she warned, particularly because these assets are now managed by entities that may lack the capital buffers or liquidity of traditional banks.

Liquidity risks, geopolitical threats, and AI adoption in global risk management

Halina von dem Hagen, the chief risk officer at Manulife, also shared her perspectives on key risks during the panel discussion, touching on topics such as liquidity, geopolitical threats, cybersecurity, and the prudent adoption of AI.

Manulife, a global financial services company, operates under its own name in Canada, Asia, and Europe, while using the John Hancock brand in the US. The firm provides insurance, financial advice, and wealth and asset management services to individuals and institutions worldwide.

For Von dem Hagen, non-financial risks were top of mind.

“And the reason is that financial risks are very important to manage well, but we have been managing them for decades. There are well-established methodologies how to identify, how to measure those risks. There are well-developed market risk mitigation tools that we can deploy in order to contain those risks,” she said.

She acknowledged that the primary concerns are financial strength, profitability, and a robust balance sheet. However, “by the same token, we very well understand the framework here, and we have tools at our disposal to manage it”, she explained. For example, she mentioned that Manulife had been effectively hedging its interest rate risk across a variety of macro and market environments.

On liquidity, Von dem Hagen stated that insurance companies, particularly life insurers, are fundamentally “cash cows” because of their consistent cash inflows.

Under the header “Liquidity risks, geopolitical threats, and AI adoption in global risk management”, please replace the 7th paragraph with this:

“We have ongoing very material premium inflows in the cash form,” she explained, adding that their balance sheet also constitutes liquid assets, including publicly traded fixed income of an investment grade, most of it in investment grade assets, large holdings of government paper.

However, she noted that liquidity risk requires careful attention, particularly in high-interest rate environments. Reflecting on her previous role as treasurer at Manulife, she highlighted a specific liquidity challenge: the demand for cash. “And this arises from the disintermediation risk in our products, renders and lapses. And in this context, absolutely, we need to pay a lot of attention to the product features, our offerings, as well as to the incentives to the distribution force,” she said.

To manage this risk, Manulife implemented containment strategies on multiple fronts and established limits for disintermediation risk.

Additionally, Von dem Hagen pointed out the importance of collateral arrangements during periods of high interest rates.

“Since we all hedge during high-interest rate periods, and we tend to hedge a downward risk in our interest rates, we would be called to post collateral on our hedges. And in this respect, and maybe somewhat counterintuitively, I have come to view the over-the-counter (OCT) arrangements as more stabilising overall for liquidity risk management relative to central clearing,” she said.

The distinction lies in the type of collateral required. While central clearing mandates cash-only collateral, the OTC market offers flexibility.

“We are free to post collateral in other forms, still highly liquid, like a government paper or highly rated corporate bonds, which we typically don’t want to sell or dispose of,” she added.

This flexibility, she said, has been “quite stabilising in the environment of the rapidly rising interest rates”.

Regarding geopolitical risks, Von dem Hagen shared how Manulife addressed these challenges through stress testing and tabletop exercises. One key takeaway from these efforts was the realisation that geopolitical risks, from a financial perspective, impact organisations to the extent that they affect global markets, meaning they have the potential to influence everyone.

She explained that although some may believe that being located outside certain regions means they are less exposed to these risks, this is not the case.

“Each of us are globally exposed to global markets on geopolitical risks, because, again, to the extent to which the transmission is through global markets, they will impact us regardless of whether we have operations in a specific region,” she said.

She emphasised the importance of having a robust risk framework for managing these financial risks on a broader scale, underscoring the need for global exposure awareness.

Von dem Hagen took a somewhat provocative stance on cyber security, saying that although it is very important, and has been for many years now, it is increasingly well managed across the sector.

“There is an increasingly well-established framework, for example, from the National Institute of Standards and Technology, with many KRIs, KPIs, through which we can measure the extent of this risk,” she said.

From a cybersecurity standpoint, Manulife’s focus is on operational resilience, which she defines as an organisation’s ability to maintain operations even if third-party providers are disrupted.

“Even if I am a fortress house and no one can get in, I am still dependent on third-party providers. And can I keep going if something happens to that third party?”

She cited the cyberattack on UnitedHealth in February 2024 as an example. The attack on UnitedHealth’s Change Healthcare subsidiary, attributed to a suspected nation-state actor, disrupted healthcare services nationwide, impacting medical billing and pharmacy services.

“The most dramatic was when the inability to keep going had really damaged confidence of customers, tarnished reputation, and resulted in adverse financial impacts,” Von dem Hagen noted.

She also welcomed the IAIS’s open-minded approach to the prudent adoption of AI.

She pointed out that organisations often focus on the risks associated with using technologies such as AI but sometimes overlook the risks of not adopting them.

“The world around us is increasingly technologically savvy,” she said.

“Expectations of our stakeholders are aligned with those technological advancements, and we as a sector have to respond to this in a manner that is prudent, but yet we cannot not engage in the progress that’s happening in the technology area.”

The IAIS is seeking feedback on the draft application paper on the supervision of AI.

Previous work by the IAIS has affirmed that the current Insurance Core Principles (ICPs) continue to be appropriate and relevant in managing these risks. The objective of the application paper is to support supervisors when applying the ICPs to promote appropriate and globally consistent oversight of the use of AI within the insurance sector.

Feedback on the document is invited by 17 February 2025. Use the consultation tool available to comment.

A public background session webinar will be held from 1pm to 2.30pm (CET) on 13 December 2024 to present the draft application paper and answer questions from stakeholders. Click here for details and registration.

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