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Life insurers add more systemic risk since global financial crisis, IMF says

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Life insurers add more systemic risk since global financial crisis, IMF says

New research by the International Monetary Fund has found thatlife insurers in major advanced economies have contributed more risk to the financialsystem as a whole since the global financial crisis, according to an April 4 release.

According to the analysis, part of the Global Financial StabilityReport, insurers have become more exposed to swings in asset prices in recent years,and as such they are unlikely to fulfill their role to channel savings to borrowersin the event of a large shock, such as a sharp drop in asset prices, precisely whenother parts of the financial system may also fail to do so.

Despite the share of higher-risk assets remaining broadly constantover time for insurers in the countries included in the analysis, the IMF foundthat "smaller, weaker and less capitalized firms in a number of countries appearto have taken on more higher-risk asset investments in recent years to resurrecttheir fortunes."

The IMF also noted other factors that may contribute to risingsystemic risk, including changes in product offerings, such as the increased relianceon annuities in the U.S., and the use of derivatives.

These developments call for a greater emphasis on macroprudentialpolicies, the IMF said. Instead of looking only at individual companies under amicroprudential approach, the IMF said, insurance supervisors should also addresscommonalities and the impact among firms and countries. Measures such as capitalbuffers that are designed to avoid insurers jointly curtailing their financing tothe rest of the system could be helpful, according to the IMF. Other measures includevaluing insurers' assets and liabilities at market prices, paired with countercyclicalmeasures, and attention to the performance and behavior of smaller and weaker firms.