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

Author

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  • Christian Thimann

    (Axa - AXA, PSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

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.

Suggested Citation

  • Christian Thimann, 2015. "Systemic Features of Insurance and Banking, and the Role of Leverage, Capital and Loss Absorption," Post-Print halshs-01314348, HAL.
    • Handle: RePEc:hal:journl:halshs-01314348
    DOI: 10.1057/gpp.2015.13
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    Cited by:

    1. Alberto Dreassi & Stefano Miani & Andrea Paltrinieri & Alex Sclip, 2018. "Bank-Insurance Risk Spillovers: Evidence from Europe," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 43(1), pages 72-96, January.
    2. Tristan Jourde, 2022. "The Rising Interconnectedness of the Insurance Sector," Working papers 857, Banque de France.
    3. Tristan Jourde, 2022. "The rising interconnectedness of the insurance sector," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(2), pages 397-425, June.
    4. Douglas da Rosa München & Herbert Kimura, 2020. "Regulatory Banking Leverage: what do you know?," Working Papers Series 540, Central Bank of Brazil, Research Department.

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