November 21, 2012 6:50 pm

Regulator warns insurers over banking move

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One of Europe’s senior regulators has told insurers they face a clampdown if they stray excessively into banking to try to increase returns.

A number of insurance companies are stepping into bank-like business, including lending, as a way to combat the low returns on traditional investments such as government bonds.

Insurers do not take deposits but have vast investment portfolios that they have usually held in assets such as bonds or shares, with smaller amounts in cash and in “alternative” assets such as private equity participations or property.

A number of insurers including Allianz, Europe’s largest by market capitalisation, are expanding their range of alternative investments into infrastructure and even into direct secured lending to the property sector or to companies.

For insurers, such steps are designed to help them generate reliable long-term returns to help meet the cost of promises to customers such as life insurance policyholders.

The initiatives also come as many banks are scaling back long-term lending commitments, partly under the weight of new regulation, such as the Basel III framework, which will attach higher risk weights to longer term lending and make it therefore less attractive to banks.

Most insurers are likely to divert only a small part of their portfolios to activities such as lending.

However, Gabriel Bernardino, who chairs the European Insurance and Occupational Pensions Authority, said insurers “should expect to be treated . . . as if they were banks” if they “heavily” developed non-traditional or non-insurance activities.

Risk could also be pushed out of banking into insurance, Mr Bernardino said.

He said insurance regulators “should be especially attentive” to any use by insurers of leverage or maturity transformation – in effect, putting short-term money into long-term assets, similar to the way banks make money from lending the deposits they gather.

“Traditionally, systemic risk was a banking concept. However, the recent crisis showed us that certain activities developed under the insurance sector can also pose systemic risk,” Mr Bernardino said in a speech in Frankfurt.

“Insurance companies or groups that engage in non-traditional, or non-insurance, activities . . . are more vulnerable to financial market developments and, importantly, more likely to amplify, or contribute to systemic risk.

“If insurance groups heavily develop their business into non-traditional or non-insurance activities they should expect to be treated in relation to those businesses as if they were banks.”

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