The transferors may have proper insight into the nature of the risks. But to whom have the risks been transferred? Are the transferees actually aware of the risks they have taken on? And are they in the best position to monitor these risks as they evolve? How do they acquire day to day knowledge about the quality of those risks? Going further, what might they do when they find out? 2  BIS Review 29/2003  Some of the concerns being expressed by private and public sector commentators in these areas are, in my view, important and worthy of further examination. Those concerns I’m talking about include: a lack of aggregate data on derivative positions; lack of transparency in accounting for them; and the potential for unexpected concentrations of risk to build up. Although in principle this redistribution of risk should be benign we simply do not have the information at present to judge what the actual impact has been. But why is all this relevant to insurance? It’s certainly true that in a lot of cases originating banks have laid risks off to other banks. There are many possible reasons for this: for diversification or to avoid concentration; opportunities to earn fees; regulatory arbitrage; and different views on pricing and spreads. But it is also well known too that risks have been transferred from banks to various areas of the insurance world. That includes reinsurance, where the degree to which such risk has now been concentrated is difficult to assess.
Otherwise you couldn’t achieve standardised capital requirements; and greater transparency is of limited value unless comparisons can be made. So the work being undertaken by the International Accounting Standards Board on a disclosure standard for insurance will be absolutely crucial in this respect. Conclusion My observations about the value of convergence in what I have called the ‘infrastructure environment’, come down to these areas of focus: First, convergence will enable better understanding of the reality, or absence, of systemic risk. In particular I’m talking about the potential for transmission of shocks between the insurance industry and the banking system. Second, it will discourage arbitrage that is based on technical accounting and regulatory factors. Instead, convergence will enable the market to focus on arbitrage which reflects the substantive evaluation of risks where real economic value may reside. And third, the added transparency of interfaces between the two industries will enhance confidence in the risk transfer arena. That will help dissipate the sort of unease which I sense around the place at the moment. The data deficiencies we confront today where the actual location of risk is so opaque is to my mind a major challenge. Better transparency will surely help to avoid adverse consequences of shocks which are inevitable from time to time. The infrastructure environment has to be robust enough to withstand these shocks. Of course there are challenges. For example: in avoiding over-engineering and over-prescription in regulation and accounting standards, and sticking more to a principles-based approach.