Insurance in the Financial System

76 Pages Posted: 14 Mar 2019

See all articles by Anastasia V. Kartasheva

Anastasia V. Kartasheva

University of St. Gallen - I.VW-HSG; Joshua J. Harris Alternative Investment Program

Date Written: December 10, 2014

Abstract

The paper reviews the principles of financial intermediation in insurance from the perspective of its functions in the financial system and assesses the effect of financial innovation on insurance functions. Insurance core function is managing risks driven by nature or related to human life. To support it, insurance companies perform the functions of pooling of resources, transferring of resources, and information production and management. Four major financial innovations affected the insurance business: hedging of market risks with derivatives, securitization of underwriting risks, asset management and credit intermediation activities of the shadow banking. While hedging of market risks with derivatives and securitization of underwriting risks enhanced industry effectiveness to perform its core functions, asset management and shadow banking activities introduced new functions of supporting the payment system and asset prices. In performing new functions, insurers compete with other financial intermediaries and markets. The analysis implies that an economic activity rather than a legal entity needs to be the basis of systemic risk regulation framework in insurance. This would also provide a coherent framework to regulate various intermediaries involved in economically equivalent activities.

Keywords: insurance, financial system, systemic risk

JEL Classification: G01, G22, G23, G28

Suggested Citation

Kartasheva, Anastasia V., Insurance in the Financial System (December 10, 2014). Available at SSRN: https://ssrn.com/abstract=3340683 or http://dx.doi.org/10.2139/ssrn.3340683

Anastasia V. Kartasheva (Contact Author)

University of St. Gallen - I.VW-HSG ( email )

Kirchlistrasse 2
St. Gallen, 9010
Switzerland

Joshua J. Harris Alternative Investment Program ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

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