J. David Cummins, Joseph E. Boettner Professor of Risk Management, Insurance and Financial Institutions, and Mary A. Weiss, Deaver Professor of Risk, Insurance and Healthcare Management, Fox School of Business, Temple University, presented findings from their paper, Systemic Risk and Regulation of the U.S. Insurance Industry. The paper is available in its entirety from the Summit research page.
In the paper, Cummins and Weiss review and analyze what characteristics contribute to an insurer’s classification as systemically risky. They consider primary factors including size, degree of interconnectedness, and lack of substitutability of products as well as contributing factors associated with systemic risk. The paper carefully distinguishes between the core and non-core functions of insurers as it addresses what functions may contribute to systemic risk.
After evaluating these factors, Dr. Weiss noted, "Any systemic risk originating from the insurance sector of the financial industry is largely due to their non-core activities."
Dr. Weiss reviewed a bivariate correlation analysis and a regression analysis to determine the relationship between characteristics of an insurer sample and a measure of systemic risk, SRISK. Activity in the non-core sector as well as the degree to which an institution is levered contribute to risk. Dr. Weiss noted that while some relationship was found between non-core activities and systemic risk, analysis indicates that insurers are not likely to be the instigators of such risk, but more likely to be victims of the bank-centric, non-core products.
The Weiss and Cummins paper also considers the US regulatory environment, looking at two model laws, ML 440 and ML 450 adapted in response to the financial crisis. It further examines the focus regulators are putting on enterprise risk management, the ORSA Model Act and FSOC’s three-stage process for determining non-bank holding companies that meet the SIFI definition.
Looking toward the future, Dr. Weiss noted that regulations should address the distinction between core and non-core activities as they examine interconnectedness and the potential for contagion. Institutions may need to provide more disclosure on their non-core activities. The breadth and scope of very large insurers may necessitate a consolidated state or federal regulator. An increasingly global world with very different approaches to capital requirements will demand a focused, but non-blanket approach consistent with IAIS standards. The industry will also need to adapt a more global accounting system.
Dr. Weiss concluded that the main activities of insurers – especially P-C insurers – are not systemically risky. While life insurers are more vulnerable to crises than P-C insurers, insolvency rates in the life insurance industry remain low and these insurers performed remarkably well during the financial crisis.
Our partners for this event, Faegre Baker Daniels, have also published a brief report of the Summit.