IMF: Insurance industry a growing risk to financial system

Insurance companies pose a larger risk to the financial system than they did before the financial crisis, according to the International Monetary Fund.

In a new report, the IMF found that the insurance industry, particularly life insurers, have taken on a more important role in the global financial system and are particularly susceptible to some economy-wide risks. As such, the international body recommended that governments keep a close watch on that sector and consider heightened rules on those firms.

{mosads}While the IMF urged stricter rules on insurance companies, its findings came several days too late for the U.S. government.  On Wednesday, a U.S. judge ruled that federal regulators did not have the right to label the insurance company MetLife as “systemically significant,” which would have subjected it to stricter rules already required of the nation’s largest banks.

MetLife sued the nation’s top financial regulators over their efforts to impose stricter rules, arguing that its work did not pose a threat to the overall financial system.

In its upcoming Global Financial Stability Report, the IMF singled out the insurance industry for specific analysis. The organization did not say that the insurance industry has grown riskier because the firms were all taking on riskier investments. However, it noted that some firms, particularly small ones or ones that guarantee a minimum level of return on some products, are dabbling in riskier bets.

But overall, the IMF said much of the challenge for the industry comes from the fact that its liabilities, which tend to span years if not decades, can make companies particularly susceptible to broad economic swings, such as the period of remarkably low interest rates that has occurred in the U.S. and Europe.

With rates particularly low, insurance companies are more susceptible to economic shocks and may not be able to fill their role as financial go-betweens during tough market times, the IMF warned.

The IMF called on government regulators to take a broad view of the insurance industry, urging watchdogs to not just ensure each particular company can stay afloat, but that the industry overall does not threaten the entire system during the downturn. As an example, the IMF suggested heightened capital and transparency standards as a possible course of action.

However, the IMF report did not address U.S. regulators’ difficulties in heightening scrutiny of MetLife.