TThe Property Casualty Insurers Association of America (PCI) this week unveiled the findings of a new study, "Systematic Solution not Systemic Problem - Distinguishing Insurance Market Risk from Systemic Importance" that will be presented to the International Association of Insurance Supervisors (IAIS) as it addresses global systemic risk regulation. The study finds that the failure of a hypothetical major U.S. property casualty insurer would not have a systemic effect on financial markets or the broader economy.
“While we remain involved in the deliberations over how federal regulators implement the Dodd-Frank Act here in the United States, it is also critical to be heavily engaged at the international level,” said Robert Gordon, PCI’s senior vice president of policy development and research. “PCI continues to lead efforts to produce a more effective and efficient regulatory system and avoid duplicative regulatory authority and unnecessary burdens on U.S. companies and their customers. Our new study is a key component to our ongoing outreach to global financial sector policymakers.”
PCI recently engaged Steptoe & Johnson LLP, a renowned international law firm, to consider the potential systemic effects of the failure of a major insurer. The new PCI study will be presented to the IAIS as it works with the Financial Stability Board (FSB) to decide whether insurers should be subject to extra regulation as “global systemically important financial institutions” (G-SIFIs).
The findings identify common misconceptions over the differences between temporary market disruption and systemic impact. While the two concepts are coterminous to an extent for very large banks, the application is very different for insurers. According to the study, a major property casualty insurer's failure would not have a systemic impact on the economy for the following reasons:
· Steady policyholder demand for products and the fact that policyholders cannot immediately demand payments means there can be no “run on the bank”;
· P/C markets are highly competitive and unconcentrated, so there is high “substitutability” – competitors will rush in to provide coverage in case of a failure;
· When necessary, industry/government concerted action has addressed market impacts;
· The state insurance insolvency process protects claimants and external markets;
· The U.S. guaranty fund system makes sure claimants will be paid;
· The slow winding-down process means assets are liquidated in orderly manner, avoiding potential stress to asset markets; and
· Parent companies are insulated from effects of catastrophe losses.
“PCI is presenting the new study as a tool for international regulators,” said Gordon. “We continue to urge the IAIS to prioritize systemic importance designations by creating transparent metrics for the riskiest activities, rather than analyzing non-systemically important activities such as traditional property casualty insurance. We also urge the FSB’s consideration of bank and insurance G-SIFI issues be de-linked to prevent regulators from incorrectly lumping all financial sectors into one regulatory framework.”