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PCI: Federal Oversight Should Focus On Systemic Risk Issue

Source: PCI

Posted on 14 May 2009

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The Property Casualty Insurers Association of America (PCI) commended the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises for scheduling a hearing today on the federal role in regulating insurance. PCI believes that the key role Congress can play is in dealing with the issue of systemic risk, which was pivotal in creating the current economic crisis.

“It is very important for Congress to deliberate and hear input from all involved parties concerning what role the federal government should play in the insurance market, and we appreciate the subcommittee’s interest in this topic,” said David A. Sampson, PCI’s president and CEO. “It remains PCI’s position that systemic risk is clearly the urgent issue that Congress should address now. Before attempting to overhaul the entire financial services regulatory system, it is important to determine which sectors of the marketplace actually create systemic risk and to fix the dangerous gaps in federal oversight. We believe it is necessary to establish a viable system for systemic risk regulation to secure our economy going forward.”

The nation is currently struggling with a massive failure of federally regulated thrift holding companies, banks, and securities companies. The Treasury Department and Federal Reserve Board must pump life into the ailing capital and credit markets while working with Congress to prevent systemic risk failures from recurring. It is important to recognize that interconnectivity, not necessarily company size, is the key element of systemic risk.

“It is not just large companies that pose a systemic risk,” Sampson said. “In fact, smaller, highly interconnected companies can pose significant risk to the entire economy, and larger companies may pose little or none. Systemic risk concerns the interconnectivity of all industries, and that is why it must be the priority.”

In the midst of the current meltdown, the property casualty industry has performed very well. PCI has developed an analysis of the recent and historical impairment activity over the last 30 years for major sectors of the financial services industry. The data demonstrate clearly that the property casualty insurance industry has a consistent and low historic impairment rate that is uncorrelated with larger economic downturns.

Other financial sectors have shown tremendous variance, with spikes in impairments going hand-in-hand with recessions. Conversely, the percentage of industry impairments since 1980 in the property casualty insurance sector has never risen above 1.5 percent, and has been consistently close to zero since 2004, even during the current down cycle.

“Facts are facts,” Sampson said. “While some industry sectors do have periodic failure spikes correlated with—and exacerbating—economic down cycles, property casualty insurance is simply not systemically risky. The best solution to the current crisis is simply to target reforms where they are needed. PCI advocates the creation of a systemic risk overseer to alert regulators to looming hazards. But the historical numbers clearly show that the property casualty industry does not present a systemic risk.”

PCI recently addressed the crucial issue of systemic risk in a two-page informational paper it provided to members of Congress and Congressional staff. This paper can be found online at