Insurers and Banks – an important distinction
By Bart De Smet (CEO Ageas)
You will be familiar with the expression: “If it looks like a duck, swims like duck, and quacks like duck, it probably IS a duck.” Now let’s try it again from the top, applying the same formula: “If it looks like an insurer, acts like an insurer, and has a balance sheet like an insurer, then it most definitely IS an insurer.” Why then when the characteristics of banks and insurers are so different, are the latter often lumped into the banking basket, when on a risk comparison basis alone, they are quite different.
While I am strongly convinced that insurers are very different from banks, over the past decade a great number of insurers have done their utmost to look and act like banks. Before establishing Ageas as an independent international insurer, we ourselves were part of the bancassurance group Fortis. In a number of cases this even led to a fully integrated financial model and the creation of financial conglomerates. But things are changing in favour of distribution agreements, joint venture agreements, and affinity contracts with major banks and other distributors. We both assume financial risks but should always be aware that our roles in the functioning of the economy are different.
Inevitably the financial crisis resulted in financial institutions being boxed together in the minds of some into a single “bad” unit. But six years on, or more, depending on your assessment of when the world was officially “in crisis”, we must as insurers continue to reinforce the distinction when talking with investors, regulators and business partners. There is evidence that insurers have been a source of stability in the financial crisis. Insurers are much better able than banks to hold assets to maturity without forced selling. We are long-term holders, not traders. But it is also fair to say that banks and insurers really have complementary skills and as such must continue to work effectively alongside one another: banks tend to be strong at analysing credit risks and structuring credits while insurers can supply long term funding. While we both seek to protect the purchasing power and wealth of consumers over the short and long term, how we go about this is quite different and requires a very distinct business model reflecting other business risks, funding strategies, balance sheets and specific ALM and investment management. In general, the balance sheets that underpin our respective business models tend to be more stable and less volatile. The mismatch between assets and liabilities also varies fundamentally in size and nature between banks and insurers. Banks usually have a more short term perspective. Insurers take a longer term view as they focus on risk pooling and risk transformation. And most importantly there is less inter-connectivity between insurers, with the exception of reinsurance practices, so insurers do not face liquidity and hence systemic risk in the same way, and as a consequence, the risk of contagion during periods of crisis is less likely.
But why is any of this important? As an investor or regulator your decisions should be taken on the basis of the insurance model and not on a generic “banking and insurance” model that doesn’t reflect the reality of how a pure insurer works. Based on Solvency II, which clearly takes into account the full risk spectrum of an insurance company, regulators have designed an insurance specific solution. Moving forward we must ensure there is better knowledge, understanding and respect for each sector allowing each to thrive on its own merits.