Is the Insurance Industry Exposed to Systemic Risk?

  • Systemic risk afflicts all life insurance and investment firms around the world.

2009 - AIG: Is the Risk Systemic?, 26 Feb 2009 - Report - 21p

  • <YES> The insurance industry is exposed to systemic risk. 
  • The viability of the insurance sector rests on the perception that insurers can and will meet their promises.

Testimony Concerning OTC Derivatives Reform and Addressing Systemic Risk Submitted for the Record, By Henry Siegel, Vice President, Risk Management and Financial Reporting Council of the American Academy of Actuaries

2009 0209 - U.S. Senate Committee on Agriculture, Nutrition & Forestry

  • Financial Stability Oversight Council Meeting - VIDEO
    • 16:30 - John Huff (Missouri Insurance Regulator / NAIC)
      • Traditional Insurance products don't create Systemic Risk, however..."
  • Because of the lowest guaranteed benefits that universal insurance provide, regulators and scholars widely discuss the potential systemic risk posed by universal insurance.
    • Insurers use short-term debt to roll over long-term investments, making the return of insurance products competitive compared to banks’ wealth management products.
  • When the investment yields fall sharply, an insurance company has to liquidate assets quickly to guarantee its liquidity, which will disturb the market and cause asset price fluctuations, and companies holding similar assets will suffer losses.\
  • At the same time, the policyholder may have a run, which will have impacts on the market, the government
    supervision behavior, the company’s reputation decline, and so forth. (p10)
  • With respect to NT <non-traditional> products, the investment guarantee products, and the universal insurance are all systematic trigger factors.  (p34)

2020 02 -  Systemic Risk in China’s Insurance Industry, Society of Actuaries - 55p

Before the 2008 financial crisis, due to the particularities of insurance regulation, business model and market structure, the traditional viewpoint was that the insurance industry doesn’t have the conditions for systemic risks.

  • Insurers do not face the same liquidity shortfall as banks have on run risk; on the other hand, insurers are more dependent on long-term liabilities than banks, thereby reducing liquidity risk.
  • At the same time, Darlap and Mayr (2006) thought that the weaker interconnectedness among insurers reduced the possibility of systemic risk spreading.
  • However, after the financial crisis in 2008, the bankruptcy crisis at AIG, the world’s largest insurer, raised concerns about systemic risks in the insurance industry, realizing that insurance industry may also give rise to systemic risks.  (p8)

2020 02 -  Systemic Risk in China’s Insurance Industry, Society of Actuaries - 55p