Q: Can the Insurance Industry Create Systemic Risk?

  • Assimilation of banking-type activities by life insurers appears to be the key systemic vulnerability.

2003 - IMF - Insurance and Issues in Financial Soundness. IMF working paper 03/138. Das U, Davies N, Podpiera R - 44p

  • Paper - Concepts for Successful Regulation of Systemic Risk
  • Section 1: Identification of Systemic Risk
    • 1.1 Definition of Systemic Risk
      • As a working premise, we define systemic risk to be the risk of a failure in a transaction or series of transactions extending beyond the parties directly involved, impacting many or most participants in the marketplace.
      • And the public gains awareness of these systemic effects on the larger group only after the breakdown has occurred.
      • The successful identification of systemic risk needs to include the consideration of the impact of risks that are currently considered highly improbable or not measurable.

2009 0514 - Testimony - AAA - James Rech, Vice President, Risk Management and Financial Reporting Council - of the American Academy of Actuaries - 12p

⇒  2009 0514 - GOV (House) - How Should the Federal Government Oversee Insurance?, Paul Kanjorski (D-PA)  ---  [BonkNote]

  • (p84) - Mr. CAMPBELL (R-CA). Talk about the life insurance subsidiary for a second.
    • I know that in your—I believe it was the company’s evaluation of systemic risk, that is where you believe there is a great deal of systemic risk, but there is a lot of counterparty liabilities to other life insurance companies. Is that true?
  • Ed LIDDY (AIG CEO). It is in both.
    • You know, we insure, on the property casualty side, we insure 94 percent of the Fortune 500 companies.
    • So the systemic risk idea is very real in both the property casualty and the life side.

2009 0318 - GOV (House) - American International Group’s Impact On The Global Economy: Before, During, And After Federal Intervention, (CSPAN) - Federal Aid to AIG Insurance, Regulators Panel -[PDF-380p,  VIDEO-CSPAN]

  • (p5) - To be clear, though, the business of life insurance, in and of itself, does not pose systemic risk to the broader economy or the U.S. financial system.  
  • (p6) - As a factual matter, that source will clarify that the vast majority of insurance does not impose systemic risk. 

--  Michael T. McRaith,  NAIC / Director of Insurance - State of Illinois

Insurance and Systemic Risk) - Paul Kanjorski (D-PA)  ---  [BonkNote]

  • An insurance business having special interconnections to capital markets may be capable of generating systemic risk, however, but financial and mortgage guarantee lines have been stressed because of their coverage of mortgage related securities, and as has been well-documented, large, complex financial institutions with insurance operations, like AIG, have produced systemic risks within the economy.  (p15)

--  Statement of Therese M. Vaughan, Ph.D., Chief Executive Officer, National Association of Insurance Commissioners (NAIC)

2009 0305 - GOV (House) - Perspectives on Systemic Risk, Paul Kanjorski (D-PA)  ---  [BonkNote]

  • Large troubled life insurers can also generate systemic risks if policyholders run to cash out their life insurance policies, or if the millions of retirees who rely on annuities suddenly learn that their contracts may not be honored sharply curtail their spending as a result. (p93)

--  Prepared Statement of Martin Neil Baily Senior Fellow, Economic Studies Program, The Brookings Institution, and Former Chairman Of The Council Of Economic Advisers Under President Clinton, and Robert E. Litan1 May 6, 2009

2009 0506 - GOV (Senate) - Regulation and Resolving Institutions Considered "Too Big to Fail", Christopher Dodd (D-CT)  ---  [BonkNote]