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Reinsurers retreat from credit default swaps - IAIS

LONDON, Oct 2 (Reuters) - The reinsurance industry has pulled back from protecting investors against non-payment of debt, reducing its exposure by 80 percent over the past nine years, industry regulators said on Tuesday.

Reinsurers sold $3.8 billion of protection through the credit default swap (CDS) market last year, down sharply from a peak of $20.3 billion in 2003, the International Association of Insurance Supervisors (IAIS) said in a report.

Swiss Re , the world's No. 2 reinsurer, and AIG , the fifth-biggest primary insurer, absorbed heavy losses on credit default swaps during the 2008 financial crisis.

AIG was forced to accept a $182 billion taxpayer bailout as a result, while Swiss Re took a $3 billion loan from billionaire investor Warren Buffett.

IAIS in May said that insurers involved in "non-traditional" activities such as writing credit default swaps could pose a risk to the financial system and may be forced to hold extra capital or meet tougher reporting requirements.

The curbs could be imposed as part of a drive by the G20 group of countries to tighten financial regulation and prevent a repeat of the 2008 crisis.

Last year reinsurers bought $3.9 billion of default protection through the CDS market, making them net buyers overall, IAIS said.

Insurers and reinsurers combined bought $227 billion of CDS protection in 2011, easily outstripping the $70 billion of protection they sold.

Switzerland-based IAIS also said that the insurance and reinsurance industry held up well last year despite a spate of costly natural catastrophes and "uneven" global economic activity.

(Reporting by Myles Neligan; Editing by David Goodman)

((myles.neligan@thomsonreuters.com)(+44 7971 818 280))

Keywords: REINSURANCE CREDIT/RETREAT