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Does EU’s planned Solvency II rules capital requirements relaxation open the door to another financial crisis
The planned relaxation of capital requirements under Solvency II could potentially increase the risk of another financial crisis. However, it is important to note that the relaxation is not a wholesale removal of capital requirements, and that there are still a number of safeguards in place to protect policyholders.
The main reason why the relaxation could increase the risk of a crisis is that it would give insurers more leeway to take on riskier investments. This could lead to a build-up of systemic risk, as insurers become more interconnected and interdependent. If one insurer were to fail, it could have a knock-on effect on other insurers, and could even lead to a wider financial crisis.
However, the European Commission has argued that the relaxation is necessary to allow insurers to invest more in long-term assets, such as infrastructure and green projects. This, they argue, will help to boost economic growth and create jobs.
The Commission has also said that the relaxation will be accompanied by a number of safeguards, such as stricter stress testing requirements. This means that insurers will still need to demonstrate that they have enough capital to withstand a range of adverse scenarios.
Overall, the impact of the relaxation of capital requirements under Solvency II is uncertain. It could potentially increase the risk of another financial crisis, but it could also help to boost economic growth. The Commission has said that it will monitor the impact of the relaxation closely, and that it will be prepared to take action if necessary.
Here are some additional thoughts on the matter:
- The relaxation of capital requirements is a complex issue with no easy answers. There are a number of factors to consider, including the potential risks and benefits, the safeguards that are in place, and the impact on the wider economy.
- It is important to remember that the Solvency II framework is still relatively new, and that it is still being fine-tuned. The relaxation of capital requirements is just one part of a wider review of the framework, and it is possible that other changes will be made in the future.
- Ultimately, the decision of whether or not to relax capital requirements is a political one. The European Commission will need to weigh the risks and benefits carefully before making a final decision.
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10 December 2023 – Navigating Turbulent Waters: Top 10 Threats to the Global Financial System and Strategies for Business Growth in 2024
As we stand at the precipice of 2024, the global financial landscape paints a picture of both opportunity and uncertainty. While the world continues to recover from the unprecedented challenges of the pandemic and its aftermath, a new set of threats looms on the horizon, posing significant risks to economic stability and business growth.
In this comprehensive analysis, we delve into the top 10 threats to the global financial system in 2024, providing business leaders with valuable insights and actionable strategies to navigate these turbulent waters and ensure their companies’ continued success.
Top 10 Threats to the Global Financial System in 2024:
- Deep Global Recession: The possibility of a severe economic downturn remains a major concern. Rising interest rates,slowing economic growth, and geopolitical tensions could trigger a global recession, impacting businesses across all sectors.
- Wave of Corporate Defaults: As interest rates rise and economic growth slows, many companies may find themselves struggling to meet their debt obligations. This could lead to a wave of corporate defaults, particularly in highly leveraged sectors.
- United States Financial Crisis: The US economy, the world’s largest, faces several challenges in 2024, including rising inflation, a ballooning national debt, and political instability. A major financial crisis in the US could have devastating consequences for the global economy.
- Sovereign Debt Crisis: Several countries, particularly emerging economies, are facing unsustainable levels of sovereign debt. A default by a major sovereign borrower could trigger a global financial crisis.
- Unwinding of Globalisation: The trend towards deglobalisation, marked by rising trade barriers and reduced international cooperation, could disrupt supply chains and lead to higher prices for goods and services.
- Climate Change: The increasing frequency and severity of extreme weather events due to climate change pose significant risks to infrastructure, agriculture, and other sectors of the economy.
- Cyberattacks: The threat of cyberattacks on critical infrastructure and financial institutions continues to grow. A major cyberattack could cause widespread disruption and economic damage.
- Social Unrest: Rising social inequality, political polarisation,and economic hardship could lead to increased social unrest and political instability, creating an unpredictable environment for businesses.
- Demographic Shifts: An ageing population and declining birth rates in many countries are creating challenges for businesses, such as labour shortages and reduced consumer demand.
- Technological Disruption: Rapid technological advancements are disrupting traditional business models and creating new opportunities and challenges. Companies that fail to adapt to these changes risk being left behind.
Strategies for Protecting and Growing Your Business in 2024:
In the face of these complex challenges, business leaders must adopt a proactive and strategic approach to ensure their companies’ survival and success in 2024. Here are some key strategies to consider:
- Build resilience: Diversify your revenue streams, strengthen your balance sheet, and build relationships with key suppliers and customers.
- Focus on innovation: Invest in research and development to stay ahead of the curve and adapt to changing market conditions.
- Embrace technology: Utilise new technologies to improve efficiency, productivity, and customer service.
- Develop a strong online presence: Build an online store and leverage social media and other digital marketing channels to reach a wider audience.
- Invest in your people: Develop your workforce’s skills and knowledge to help them adapt to new technologies and business models.
- Strengthen your cybersecurity defenses: Implement robust cybersecurity measures to protect your data and systems from cyberattacks.
- Build a strong brand reputation: Engage in corporate social responsibility initiatives and cultivate a positive brand image to build trust with customers and stakeholders.
- Practice strong governance: Implement sound corporate governance practices to ensure transparency, accountability, and ethical business conduct.
- Stay informed and adapt quickly: Monitor global events and economic trends closely and be prepared to adapt your business strategy accordingly.
- Seek expert advice: Consult with financial advisors, legal professionals, and other experts to help you navigate the complex challenges of the global financial landscape.
By understanding the top threats to the global financial system and implementing these strategies, business leaders can position their companies for success in 2024 and beyond. It is crucial to remain vigilant, adaptable, and proactive, and to embrace the opportunities that lie amidst the uncertainties. The global economic landscape may be turbulent, but with foresight, strategic planning, and sound decision-making, businesses can weather the storm and emerge stronger and more resilient.
23rd March 2022 – Global Financial Crash 2022 to 2024
Many financial experts have been prophetic for more than 12 months – many before the pandemic hit in early 2020. The last financial collapse was in 2008 and was caused by the financial services industry, regulators and politicians. Whatever the cause a financial crash normally happens every 10 years roughly. In 2020 we were long overdue one but maybe the financial crisis caused by the pandemic was just a precursor for the Mother Of All Financial Crashes. The war in the Ukraine has a compounding effect that is triggering supercharged global inflation that will turn into a recession when energy crisis plus a food supply crisis combine to cause massive suffering globally.
However, the financial services industry is likely to chip-in to the runaway recession which could then easily turn into an economic depression lasting years – perhaps a decade. Sprinkle in winter lockdowns due to morphing pandemic of viruses and healthcare collapse then an economic depression is only a few bad political decisions away from reality.
To see how the financial services will contribute to the coming depression you need only look at many subsets of services to identify dominoes that are on verge of falling. For example subprime car loans in USA are under real pressure at a time when the Federal Reserve wants to aggressively increase the cost of borrowing across the board in America. The cost of living in the USA is spiralling out of control meaning fewer people over next 24 months will be able to cover their car loans than have managed over last 12 months. Overdue payments have already spiked hugely but bad debt will worse in America. When America catches a bug the world sneezes is still true, but China is fighting a spike over Covid bug at same time which will affect production in China and supply chain issues globally.
USA households currently hold an all time record of 15.6 trillion dollars of debt. They borrowed 1 trillion more dollars in 2021 alone which is a record increase in any one year. What happens to these people when interest rates rise aggressively in 2022? What happens as businesses start to lay off employees to reduce costs? Not being able to repair car loans has been a bubble just waiting to burst not just in USA but in the UK too. When this bursts not only individuals are affected. Businesses in the financial services industry fail. 2008 is set to be a baby of a financial crisis compared to 2022 to 2024! Strap yourself in folks!
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Use Of Derivatives In Effective Business Risk Management
Derivatives help to keep business transaction costs low in the marketplace. Derivatives also offer other benefits like bringing liquidity to the market. Money is the fluid that keeps big business marketplace moving smoothly with less interruption or obstructions to business.
Most large businesses use derivatives to manage foreign currency movement risks. In addition derivatives manage the risk from interest rate movements and to protect themselves against commodity price fluctuations.
5th February 2020 Should Financial Services Sector Diverge Away From European Union Post Brexit?
After seemingly as a whole sector arguing against Brexit many financial services leaders in London want the UK to now diverge away from some European Union EU rules so it can be more competitive around the world.
The European Union says divergence leads to restrictions on ability to do business with European Union countries yet many senior leaders in the likes of insurers are arguing fro divergence. Others say the UK needs to stay in alignment with EU rules to allow the UK to continue uninterrupted trading with the EU member states.
The UK in reality has around 6 to 11 months to decide how it leaves the EU after the end of the transition period at the end of 2020. However the EU ha smade an opening free trade talk gambit that says the UK can only have cutting edge free trade agreement if it maintains alignment with EU rules and agrees to this in writing not just in principle. It also wants the European Court of Justice to decide if the UK does step out of alignment. The UK government says it does not want tied into alignment in writing nor to be judged by EU court.
Management of risk in financial services
Are you responsible for managing risks in your financial services business?
Poor risk management in financial institutions is self evident. Very few financial services businesses would not have had risk management systems in place prior to financial crisis in 2007 2008. However, enterprise risk management ERM is but a tool. The ERM tool is only as effective as the person or business employing it in practice.
2008 was not the last time ERM failed. The UKs biggest financial services institutions are still making mistakes that can only arise through the inadequate use of ERM principles and practices. And the result is continued loss of shareholder value loss making financial services businesses loss of jobs in financial services industry and customers who have suffered financially fatal losses.
Business risk in financial services industry is the driver of success or failure. Use an enterprise risk management ERM framework to bring about risk culture change and improve corporate governance and regulatory compliance
Our financial services business risk partners can assist you in achieving your strategic operational and project objectives whilst cost-effectively and pro actively managing your enterprise wide risk. Financial services risk management combines action on corporate governance enterprise risk management and regulatory compliance GRC.
Helping connect business leaders in the financial services industry around the world
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Risk in financial services industry in UK are varied complex and interrelated. Political economic social technological legal and environmental risks all play a part in the success or otherwise of a financial services business in the UK.
How an organisation responds to existing and emerging financial services risks will define its future business resilience and sustainability. Survival is not a given never mind success!
Recent surveys have found that people in the UK are on average not investing for their future. Business investors are concerned about the threats rather than the opportunities from Brexit.
The investment climate either creates a buying opportunity or threat to wealth depending on your view of the intermediate and long-term future of the UK and global economy.
In the UK consumers are borrowing more and continue to spend spend spend! High levels of employment and the low unemployment rate creates a level of sustainability that belies the fears of the professional investors.
Financial services industry businesses can collapse if they do not manage risks effectively
Over the years there have been many examples of financial services business leaders who have underestimated the potential effect of doing things badly.
Read articles about the business environment in the UK
Key Types of Financial Services Risks include :
- Regulatory pressures because the cost of compliance has risen and the cost of noncompliance can be severe
- Low interest rates because they reduce the income potential from many financial products or businesses
- Brexit because of the loss of Passporting may have an impact on income from European Union but there is significant uncertainty on the severity of the impact.
- Skills Gap despite worries of job losses due to Brexit there is actually a shortage of skilled workers in the financial services industry. The costs of employing people in the City of London are increasing as a result of the developing skills gap.
FinTech creates more opportunities to improve the profitability of financial service provision and allow more entrants to the marketplace to compete with traditional financial services providers.
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Understand Insurance Regulatory Framework and Requirements Including Those Under Solvency 2
Solvency 2 is a risk based system defining the capital requirements with a standard formula or an internal model or taking.
How much capital and financial resources do insurers and reinsurers need to hold to cover the risks to which they are exposed? Solvency 2 Directive came into force on 19th December 2013. There were delays before member states had to enforce Solvency 2. The Solvency regime came into force for insurers on 1st January 2016 at which time Solvency 1 regime ceased to apply.
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Insurers are obligated to take account of all types of risk which they are exposed and to manage those risks more effectively. Solvency 2 aims for a risk based solvency regime including reporting requirements in accordance to the nature scale and complexity of the insurance business.
The Solvency 2 rules also lay down the principles that should guide insurers overall risk management so they can be robust enough to cope with adverse risk events effectively including economic risks market risk and operational risk.
Solvency 2 is based on Three Pillar Framework. Pillar 1 is the minimum capital requirements. Insurers must maintain reserves against liabilities. Minimum Capital Requirement MCR the fundamental level of solvency required of any insurer. Solvency Capital Requirement SCR represents the target level of solvency which an insurer or reinsurer needs to maintain (its a risk based calculation which is made through a standard consistent formula or by using internal models or combination of both). The SCR is the capital needed by insurer considered enough after risk based assessment to cover liabilities. The holistic assessment must address the quality liquidity and profitability of the assets covering the liabilities. Insurers must meet the MCR and SCR at all times.
Pillar 2 is the supervision risk. Insurers are required to submit their own assessment of risk and solvency capital adequacy ORSA Own Risk and Solvency Assessment. Insurers need to submit details of their internal systems and controls. Supervisors may ask for addition capital to be retained if the insurers risk profile deviates significantly from the assumptions underlying the SCR. Insurers must have appropriate corporate governance and stress test their systems and procedures.
Pillar 3 public disclosure. Insurers are required to report publicly on their financial condition providing information on capital. Insurers must follow right accounting standards and regulatory reporting rules. External ratings agencies will review insurers own assessments and arrive at appropriate conclusions.
International Association of Insurance Supervisors IAIS is the global standard setting body for the insurance industry. It represents insurance regulators and supervisors of hundreds of jurisdictions issuing global insurance principles standards and guidance papers.
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