SYSTEMIC RISKS

Insurance: The Next Global Financial Danger

Metlife-AP
Insurers like MetLife, but also Germany's top firms, could be the next big global financial risk.
  • Why it matters

    Why it matters

    An IMF report warns of growing systemic risks to the world financial system, including the vulnerability of insurance companies and the increasing interdependence of capital markets.

  • Facts

    Facts

    • Low returns on capital because of ongoing ultra-low interest rates are threatening the basic financial model of insurance companies worldwide.
    • Since 2011, German life insurance companies have set aside €32 billion to cover commitments made at a time of higher interest rates. More will almost certainly be needed.
    • Global diversification of investments is intended to minimize individual risk for investors and firms, but paradoxically, it can also increase systemic global risk.
  • Audio

    Audio

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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.

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