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The Global Federation of Insurance Associations (GFIA) has told the International Association of Insurance Supervisors (IAIS) that it should focus on sector-wide vulnerabilities not the “systemic importance” of individual insurers.

The GFIA was responding to a consultation by the IAIS on its draft application paper on macroprudential supervision. In its response, the GFIA states: “GFIA takes the view that monitoring and assessment of sector-wide vulnerabilities should be the prime focus, thus enabling supervisors to focus on vulnerabilities of distressed or failing insurers, where relevant. Currently, the application paper seems to place more emphasis on the assessment of the potential systemic importance of individual insurers, rather than the assessment of sector-wide vulnerabilities.”

The GFIA says it is concerned that the paper’s focus on the assessment and systemic relevance of individual insurers departs from the identification, monitoring and assessment of insurance sector-wide vulnerabilities and common exposures, and the risk of distressed or failing insurers or the collective actions or distress of a sufficiently large number of insurers.

Elsewhere in the response, the GFIA says it welcomes the reference made by the IAIS to, and the application of, the overarching concept of proportionality in macroprudential supervision. “The insurance sector appreciates the paper’s clear statement that the proportionality principle must be consistently applied to macroprudential supervision, and that nothing in the paper supersedes this principle.

The GFIA encourages the IAIS to continue to stress the importance of the proportionality concept where there could be ambiguity in sections of the paper about the need for proportionality in the application of macroprudential supervisory measures,” the response states.

The GFIA also states that supervisors should be able to base their assessments on their knowledge of insurers, the markets for which they are responsible and the data that they already have access to. And it stresses the importance of ensuring flexibility is embedded in the IAIS’s approach to macroprudential supervision.

The GFIA says it agrees that supervisors are required to have “an established process to assess the potential systemic importance of individual insurers and the insurance sector”. It states: “In this case, the systemic importance of the insurance sector should not be assessed alone, but rather within the entire financial system, including other sectors such as banking and securities. In particular, due consideration should be given to the fact that systemic risk of core insurance activities is limited and the scale of potential systemic risk in the insurance sector is much smaller than that of banking.”