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Nematrian Reference Library

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Executive Summary (partial) "The purpose of this paper is to provide actuaries with the background to address conditions and tools to identify, assess, monitor and mitigate systemic risks. The scope of this paper is limited to global insurance market operations and risks of systemic events in those markets. From the global context, a macro-prudential approach towards the regulation for systemic risk is assumed. The role of actuaries in assisting systemic risk regulators with respect to insurance markets is identified and discussed in a global market context. This paper uses the definition of systemic risk defined by the Financial Stability Board (FSB) and the International Monetary Fund (IMF). Products and services provided by the banking, insurance and financial markets, irrespective of regulated or non-regulated, continue to evolve. Technology is driving financial entities toward greater economies of scale (size) and significantly more complex strategies, tactics and operations as they are structured to provide an expanded range of services. Globalization is allowing for rapid product and service expansions. Under most economic scenarios, trends in financial modernization increase market efficacy and efficiency. However, as global markets display greater inter-dependencies, there is also greater susceptibility to higher correlations across product lines. In addition, systemic risk is increased where participants have large market shares based upon speculative market positions. Such scenarios could lead to some entities in the insurance sector being a cause of, or a participant in, a systemic risk event. From a regulatory position, the simple postulation that insurance sector entities will not be a source of future systemic risk events due to historical observation could lead to the failure to identify, assess, monitor and mitigate the critical trends and signs of future systemic risk events."

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