Increasingly, Washington leaders are talking about systemic riskas the issue to stabilize the markets and prevent a repeat of theproblems that caused our economic downturn. From President BarackObama to House Financial Services Committee Chairman Barney Frank(D-Mass.) to various other top leaders in our nation's capital,systemic risk is increasingly listed as the top priority within thebroader context of financial services reform. The Property CasualtyInsurers Assn. of America (PCI) fully agrees. In fact, we have beensaying for months that systemic risk in the financial servicessector is the top issue that the federal government must address.Our leaders must not be sidetracked by other issues, such asfederal versus state regulation of insurance, which have beenongoing for decades and have no immediate resolution. The lengthydebate over whether to regulate insurance at the federal or statelevel is not the right question to discuss at this time. Theresults of that debate will do nothing to ease the overall economiccrisis, which largely occurred because of a series ofinterconnected market failures.


So, what exactly is systemic risk? In plain language, if thefederal government has to step in to bail out a company to protectthe larger economy, that's a systemic risk.


To expand on this definition, we think it is incorrect to saythat a company poses systemic risk because it is “too big to fail.”The correct measure, we believe, is not whether a company is toolarge, but “too interconnected to fail.” A large insurer may poseno systemic risk, while a small, interconnected financial companymay have a profound impact on the overall market because itsfailure would create a systemic ripple effect. That leads me to mynext point, which is that traditional property-casualty insurancecompanies are not generally so interconnected that they pose asystemic risk. They do not create any counter-party risk and theirexposures are not correlated with other systemic waves or economiccycles. For instance, a downturn in the economy does notnecessarily lead to more auto insurance claims. Additionally, thereare many competing auto insurance suppliers, so the failure of evena very large international auto insurer would have minimalsequential systemic risk impact. Even in this economic downturn,the vast majority of property-casualty companies are wellcapitalized and solvent, continuing to provide ample coverage inopen markets. To address the economic crisis, restore investorconfidence and prevent another economic disaster from recurring,PCI advocates the creation of a systemic risk overseer within theFederal Reserve Board (FRB). However, the FRB's systemic riskoversight should be completely separate from other bank holdingcompany oversight powers. Jurisdiction would include anyinstitution engaged in financial activities that in aggregatepresent a significant systemic risk. Also included would be anyfinancial institution that submits to federal systemic riskoversight, such as for international equivalency treatment. Increating a systemic risk overseer, it is crucial that legislatorsdo not confuse solvency with systemic risk. Solvency regulation isconducted by functional regulators to ensure that companies havesufficient capital to meet their obligations. Systemic riskoversight would prevent holding company failures from contaminatingother markets and the larger economy. Merging solvency regulationinto systemic risk oversight would only create a “too big to fail”regulator, and as we have noted, this is not the best measurement.These proposals are practical solutions, and solving the systemicrisk crisis does not require a vast new regulatory bureaucracy. PCIstands ready to work with our nation's leaders to develop a viableresolution that will stabilize our economic markets and keepanother such crisis from happening.

Want to continue reading?
Become a Free PropertyCasualty360 Digital Reader

  • All news coverage, best practices, and in-depth analysis.
  • Educational webcasts, resources from industry leaders, and informative newsletters.
  • Other award-winning websites including and

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.