With the global financial system yet to recover from the 2008 crisis and the pressures on banks globally,the Economic Survey 2011-12 has raised serious concerns over strong inter-linkages between the insurance and the banking sector in India since it exposes an insurer to risks in case some other business of a bank collapses.
Inter-linkages between the insurance and banking sectors are a matter of concern with many insurance companies being part of financial conglomerates. Any financial stability issue regarding banks in the conglomerate may have an amplifying effect on the insurer, said the survey.
Reacting to the observation,the insurance regulator said it was aware of the risks and was working to create firewalls. There are various businesses with banks and if one collapses it may impact the other. We are working on how to insulate them. It may not be possible completely,but we are working on how to save one if the other collapses, J Hari Narayan,chairman,IRDA told The Indian Express.
The survey further suggests that barriers need to be built in order to prevent the sector from facing any adverse impact of a fallout of the stress in other sectors. Any financial stability issue regarding banks in the conglomerate may have an amplifying effect on the insurer, the survey noted. Efforts therefore have to be made towards building firewalls to prevent contagion from one sector to another,especially in times of stress, it added.
Insurance experts said that the only concern may be on the fact that banks substantially invest in insurance business and if they are impacted,then it may affect the funding of insurance companies. What the government may look to do is issue a guideline and fix a cap on the exposure of banks to insurance companies. They may ask banks to bring down their exposure to a certain level in a given time frame, said SB mathur,secretary general,LIC.
A senior executive with a leading insurance company promoted by a bank said,The only concern I see is on the monitoring front. What are the various businesses that a financial conglomerate has and how does can one affect the other, the executive said.