Financial markets

Financial Market Trends No.87, October 2004


Please find below an overview of each of the articles published in the October 2004 issue of Financial Market Trends:

Highlights of Recent Trends in Financial Markets

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Convergence in the Financial Sector: Where are we coming from and where are we going?

Increased interdependence and inter-linkages among banks, capital markets, insurance companies, and other financial institutions such as hedge funds, have led to growing convergence among institutions and products in the OECD area. In a number of OECD countries the norm has become for financial institutions to form large groups that offer the full range of financial services. Institutional convergence also manifested itself by the diminishing role in some jurisdictions of the traditional universal-bank model. Moreover, starting in the 1980s and 1990s, one could observe in all jurisdictions stronger and growing links between banks and capital markets. This process, strongly supported by the introduction of new risk management procedures and technologies and financial innovations, continued without interruptions to this day.

While financial convergence has resulted in more efficient markets, it has also created new challenges for financial institutions, regulators, supervisors and international standard-setters. Recent developments have highlighted various governance challenges facing internationally active complex financial groups, including the adaptation of risk management techniques and procedures to the structure of such groups.

Looking forward, it seems unlikely that the pace of overall financial sector convergence will slow down. The example of Basel II shows that public policy can continue to play a facilitating, or even encouraging, role via the adoption of global standards. Change and adaptation is underway within each type of financial system (relation-ship based and arm's-length systems) and what will emerge in the end will be essentially market-determined (although political interference still plays an important role). It seems perhaps to be less clear than in the past whether there will be a continuation of the growing trend towards the fully integrated conglomeration model. The trend to large complex organisations that offer the full range of products may be replaced by more flexible and less integrated financial groups that offer a more limited range of core services.

International Risk Transfer and Financing Solutions for Catastrophe Exposures

The adverse economic impact from natural catastrophes and man-made disasters has increased significantly over the past decade and the resurgent terrorism has increased the unpredictability of loss potentials. Capacity and prices in the reinsurance market are sensitive to recent loss experiences and follow a cyclical pattern influenced by major catastrophe events. In view of tighter conditions in the reinsurance market, alternative risk transfer and financing solutions have received increasing attention, including catastrophe derivatives, risk-linked securities, contingent capital instruments, and committed credit facilities. The market for risk-linked securities has emerged as a stable source of risk transfer solutions for different natural hazards and recent transactions have extended coverage to terrorism exposures. In contrast, exchange traded catastrophe derivatives have not been economically viable and contingent capital instruments are not currently focused on catastrophe risk financing. Different types of committed credit facilities are well developed in the banking market and may serve as a complementary credit reservoir. Some alternative risk transfer and financing solutions have become steady elements of the financial markets and provide incremental capacity for catastrophe risk cover but the market is not expected to expand dramatically in the near future. With the extreme loss potential of mega-catastrophes these risks are often not insurable on commercial terms. Therefore, some market inducement may be required, e.g., in the form of insurance pools possibly with government backing, to ensure availability of cover for large risk exposures.

Private Health Insurance in OECD Countries: The Benefits and Costs for Individuals and Health Systems

Governments often look to private health insurance (PHI) as a possible means of addressing some health system challenges. For example, they may consider enhancing its role as an alternative source of health financing and a way to increase system capacity, or promoting it as a tool to further additional health policy goals, such as enhanced individual responsibility. In some countries policy makers regard PHI as a key element of their health coverage systems. While private health insurance represents, on average, only a small share of total health funding across the OECD area, it plays a significant role in health financing in some OECD countries and it covers at least 30 per cent of the population in a third of the OECD members. It also plays a variety of roles, ranging from primary coverage for particular population groups to a supporting role for public systems.
This paper assesses evidence on the effects of PHI in different national contexts and draws conclusions about its strengths and weaknesses. Private health insurance presents both opportunities and risks for the attainment of health system performance goals. For example, in countries where PHI plays a prominent role, it can be credited with having injected resources into health systems, added to consumer choice, and helped make the systems more responsive. However, it has also given rise to considerable equity challenges in many cases and has added to health care expenditure (total, and in some cases, public) in most of those same countries.
PHI also raises certain challenges that cut across its different roles. Policymakers will need to intervene to address market failures in order to assure PHI access for high-risk groups. In doing so, they can choose from a range of tools. They need to balance the sometimes competing goals of access and the maintenance of a broad and diverse pool of covered lives, particularly in voluntary markets.

Guidelines for the Protection of Rights of Members and Beneficiaries in Occupational Pension Plans

A central element of the programme of work of the OECD’s Working Party on Private Pensions has been the development of principles of regulation and supervision and guidelines related to the maintenance and oversight of private pension plans and funds. This work has been done in conjunction with the International Network of Pension Regulators and Supervisors (INPRS). The guidelines specifically address the rights of pension plan members and beneficiaries, an especially vital aspect of any pension programme.

OECD’s Financial Education Project

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Global Pension Statistics Project: Measuring the Size of Private Pensions with an International Perspective

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