Risk Aggregation
Risk Aggregation

What We Think?

A well-functioning financial system should have robust risk aggregation capacity through a range of institutions, such as commercial banks, insurance companies and mutual funds, with the appetite and ability to hold and manage risk. This complements financial institutions whose footprint is narrow and local. In insurance, for example, it is critical that the risk pool is large enough so that any one systemic shock does not wipe out the entire insurance corpus of a community – herein lies the need for better risk pooling/aggregation across a variety of local originators.

The important issues here are around appropriate regulation and management of aggregators. There is significant ongoing work on this aspect especially following the financial crisis. IFF is working with some leading global think tanks to track this research and distil relevant learning for the Trust.

What is Happening Now?

A well developed and efficient debt market is essential for robust risk aggregation. Even though India’s equity market has successfully developed over the last few years, debt markets have seen little progress in terms of financial inclusion and broadening the investor base. They still lack liquidity and current risk aggregators like insurance firms and mutual funds face stringent regulatory restrictions on investments made. Given this the presence of non-banking financial institutions remains almost non-existent thereby reducing the number of capable aggregators who can purchase systematic risk from localised originators. Regulatory restrictions also inhibit participation by other foreign risk aggregators who have the capacity to induce liquidity into India’s debt markets.

Our Work

To initiate dialogue and debate on the issue of robust aggregation and the role of institutions in creating an efficient market, IFF is organising a Summer Conference this year.  This conference will be attended by leading academics, practitioners and regulators from around the globe, in the field of financial systems and design and will aim to encourage free flow of thoughts on the themes discussed.

IFF has also partnered with Brookings Institutions and Centre for Global Development in the past to build a deeper understanding and publish a series of financial system design principles and a case for why financial inclusion and stability of financial systems are complementary goals.