Systemic Features of Insurance and Banking, and the Role of Leverage, Capital and Loss Absorption

This paper aims at providing a conceptual distinction between banking and insurance with regard to systemic regulation. It discusses key differences and similarities as to how both sectors interact with the financial system. Insurers interact as financial intermediaries and through financial market investments, but do not share the features of banking that give rise to particular systemic risk in that sector, such as the institutional interconnectedness through the interbank market, the maturity transformation combined with leverage, the prevalence of liquidity risk and the process of money creation. The paper also draws attention to three salient features in insurance that need to be taken into account in systemic regulation: the quasi-absence of leverage, the fundamentally different role of capital and the "built-in bail-in" of a significant part of insurance liabilities through policyholder participation. Based on these considerations, the paper argues that, if certain activities were to give rise to concerns about systemic risk in the case of insurers, regulatory responses other than capital surcharges may be more appropriate.