No Systemic Risk from Insurance

Systemic risk continues to be the buzz word of the financial services regulatory reform debate, so a couple of recently released reports are helpful in underscoring the point that insurers are not usually systemically risky and did not cause the financial crisis. First up a special report from the international insurance think tank, the Geneva Association which says the core activities of insurers and reinsurers do not pose systemic risks. This is because the insurance business model has the following specific features that make it a source of stability in the financial system:

  1. Insurance is funded by upfront premiums, giving insurers strong operating cash flow without requiring wholesale funding.
  2. Insurance policies are generally long-term, with controlled outflows, enabling insurers to act as stabilizers to the financial system.
  3. During the hard test of the financial crisis, insurers maintained relatively steady capacity, business volumes and prices.

The Geneva Association’s observations follow the recent release of a report by the Property Casualty Insurers Association of America (PCIAA) and NERA Economic Consulting  that concludes  that a financial institution’s asset size should not be the primary determinant of systemic risk. In fact PCIAA/NERA’s study found that using size alone can have major negative economic consequences, cost jobs and increase systemic risk if used in financial services reform legislation. Meanwhile, an online article by Business Insurance’s Mark Hofmann reports that a coalition of property/casualty insurers has sent a letter to the chairman of the Senate Banking, Housing and Urban Affairs Committee asking that the p/c industry not be subject to “bank-centric† financial services regulation. Check out I.I.I. information on regulation modernization.

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