The global financial system faces more systemic risk from the insurance sector, including life insurers, according to the International Monetary Fund (IMF).

While the risk posed remains below that of the banking sector, the IMF’s latest Global Financial Stability Report calls for greater scrutiny of the sector, given its growing role in financial markets.

“The findings suggest supervisors and regulators should take a more macro-prudential approach to the sector,” the report says.

“Doing so is necessary if supervision is to go beyond the solvency and contagion risks of individual firms and take on the systemic risk arising from common exposures.”

Insurers hold more than $US24 trillion ($31.5 trillion) in global assets and longer-term liabilities, making them highly vulnerable to swings in asset prices, especially after the 2007-09 financial crisis.

“This increase is largely due to growing common exposures to aggregate risk, caused partly by a rise in insurers’ interest rate sensitivity,” the report says. “Thus, in the event of an adverse shock, insurers are unlikely to fulfil their role as financial intermediaries precisely when other parts of the financial system are failing to do so as well.”

The low interest rate environment is a source of concern, particularly for the life sector, because its business models are typically built around promised rates of return exceeding the returns on available “safe” assets.

Non-life insurers face less pressure in this regard because they can reprice contracts more easily and have shorter investment horizons.

“Changes in the investment behaviour of insurers may have contributed to higher systemic risk through various channels,” the report says.

“The insurance sector could be a significant contributor to systemic risk even if no single insurance company were systemically important.”