Insurance and financial stability.

Abstract

The major shocks that hit the insurance sector have raised questions as to the role of this sector in financial stability and as to whether it is a potential source of systemic risk. The complexity of financial conglomerates, risk transfers and reinsurance have intensified these preoccupations. From an in-depth analysis of both its characteristics and empirical data on possible contagion from this sector, we can conclude that the insurance sector does not appear to be a source of systemic risk for the economy. Nevertheless, it may be a source of destabilising shocks for both the financial sector and the economy as a whole. The emergence of financial conglomerates, the transfer of a significant share of credit risk to the insurance sector and the particular role taken on by the reinsurance sector do not alter this conclusion. Its potential to destabilise the financial system clearly justifies the regulation of this sector and, in particular, the monitoring of the solvency of insurance companies. Nonetheless, the insurance sector’s long- to very long-term horizon not only calls for specific rules but also rules that are sufficiently flexible to adapt to changing circumstances. Such regulation would allow the insurance sector to fulfil its expected role as a shock absorber.