Growing fragmentation of the global financial system could amplify shocks across insurance markets if it coincides with broader asset market stress.
This is according to a new report by The Geneva Association, which examines how geopolitical considerations and increasing barriers to cross-border finance are reshaping the environment for insurers and reinsurers, particularly in areas including international risk transfer, investment and capital management.
The report finds that financial fragmentation alone is likely to have manageable implications for insurers, but could create greater vulnerabilities when combined with financial market stress.
Fragmentation can make cross-border reinsurance more difficult to access, increase coverage costs and leave insurers retaining more risks in local markets. As fragmentation broadens, international insurers could also face reduced diversification and less efficient capital allocation, while constraints on liquidity and capital buffers could amplify balance sheet pressures during periods of market stress.
Insurers can mitigate these risks by reconfiguring their risk transfer strategies, adapting their capital structures and strengthening liquidity management, the report said. Policymakers also have a role in maintaining cross-border supervisory cooperation and safeguarding payment and settlement infrastructure.
“Financial fragmentation affects insurers through multiple channels simultaneously – from reinsurance markets to investment portfolios and liquidity,” said The Geneva Association Director of Research Darren Pain, who also co-authored the report.
The Geneva Association Managing Director Jad Ariss said geopolitical considerations are playing a greater role in shaping financial markets, creating implications for an industry built around international risk sharing and long-term investment.
“For an industry built on international risk sharing and long-term investment, understanding how these changes affect the resilience-enhancing role of insurers is essential,” Mr Ariss said.
Mr Pain added that examining the investment and liability sides of insurers’ balance sheets together provides tools to assess how financial fragmentation could influence industry resilience and where firms should focus their preparations.