Report criticises Basel II

A new CSFI report sets out why the insurance industry is failing to gain an advantage from the new capital rules

LONDON - A new report from the Centre for the Study of Financial Innovation (CSFI), A tough nut… Basel II, insurance and the law of unexpected consequences, explains why insurers have so far had little joy from Basel II, which is supposed to provide a new role for insurance as a mitigator of operational risk.

Author Shirley Beglinger explains that, because Basel II was “written by bankers, primarily for bankers”, demands on insurers are expressed in a way that the insurance industry would be hard-pressed, or unable, to meet. Beglinger, who has worked both for the banking and the insurance industries, says that linguistic differences between the two make the problem of complying with Basel II exasperating for both sectors. She has worked with Swiss Re to gain Basel II recognition for insurance as a mitigator of operational risk.

As the deadline for Basel II approaches, Beglinger claims that insurers are handicapped in their role of mitigating operational risk, even for banks operating the internal ratings based and advanced measurement approaches. To facilitate the insurers’ task, she recommends that the confidence interval for calculating operational risk regulatory capital be reduced; insurance products be given the same generosity as credit derivatives in risk mitigation; and that the market of eligible banks for insurance risk mitigation be broadened.

Beglinger also proposes a complete rewrite of Basel II insurance rules to better cater for the buying and selling of insurance products. As the world is going ahead with Basel II – US exceptions aside – she recognises that scope for a full eleventh hour rewrite is at best optimistic. Initial industry responses suggest that the industry will struggle to amend existing policies, and that changes in the insurance industry will inevitably complement Basel’s evolution. The value of Beglinger’s paper is perhaps more as a warning – highlighting increasingly unavoidable conflicts between the banking and insurance industries.