Since the collapse of global financial markets in 2008, politicians and regulators have been watching banks closely for signs they might trigger a new crisis. But there are other areas where systemic risk can be generated – areas that might have been overlooked.
In a new report, the International Monetary Fund (IMF) warned that a different sector could now be posing a grave risk of the financial system: the insurance business, long seen as a bastion of stability.
Chronically low interest rates are severely squeezing returns on capital, and volatile currency markets may threaten to set off chain reactions. According to the IMF, both the systemic importance of insurance and their vulnerability are sharply increasing. The insurance industry’s significance for global financial stability is still well below that of the banks, but it can no longer be overlooked.
While the IMF is now putting these dangers on the global map, they’ve long been a factor in Germany. The country’s financial regulator, BaFin, has already warned of these risks. It says insurance companies will have to do a better job of adapting to a long period of low interest rates.
“Anything else would simply be negligent,” was the clear message in February from Frank Grund, BaFin’s chief executive director of insurance and pension funds supervision.