Property/Casualty Insurance and Systemic Risk
To prevent another financial meltdown like the one that affected the world’s financial system in the fall of 2008, regulators are now considering, as part of the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, criteria for determining which financial institutions might fail and, if they did fail, which would pose a broad threat to the financial system. Any institution thus categorized would be subject to closer scrutiny and more stringent regulation, making its failure less likely. Further, such institutions would be assessed fees for a fund that would help manage the obligations of failed institutions. But the plan could be harmful if it includes companies that pose no threat to the system. Property/casualty (P/C) insurers, not one of which failed as a consequence of the financial crisis or the ensuing “Great Recession,” are one such category of company. Inappropriate inclusion of P/C insurers could cause harm not only to insurers, but to consumers and the efficacy of financial institution regulation in general. The report reviews specifically how this inclusion could do economic harm and concludes that P/C insurance is fundamentally different from banking, posing no systemic risk to the financial system.
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