NU Online News Service, Nov. 5, 3:54 p.m. EDT
Property and casualty insurance companies do not pose a systemic risk to the U.S. financial system and should not be subject to federal supervision, the American Insurance Association said in a comment letter to the Financial Stability Oversight Council.
The AIA letter was in response to a request for comments on an FSOC advanced notice of proposed rulemaking on what criteria should be used in subjecting nonbank financial companies to heightened supervision by the Federal Reserve Board under the new Dodd-Frank law.
In its letter, the AIA said p&c companies should not be subject to such supervision because, while "essential" to the U.S. financial system and overall economy, they do not pose a threat to financial stability.
The AIA said p&c companies "do not present leverage to the economy and do not have an infrastructure maintenance function."
J. Stephen Zielezienski, AIA senior vice president and general counsel, signed the letter, which states, "There is little evidence of insurance either generating or amplifying systemic risk, within the financial system itself or in the real economy."
AIA noted that this is because insurance companies operate under a different business model than other financial firms, based on an "inverted cycle of production" where premiums are received up-front. "This means that the product–the contractual promise to pay an agreed amount only if a particular event occurs in the future–is sold at a price, the insurance premium, which has to be estimated before knowing the actual cost of the product which depends on probabilities of occurrence and severity of future events," the letter states.
The letter calls for the FSOC to differentiate between insurers and other financial services companies, stating that "application of a 'one size fits all' approach…presents a danger that the FSOC will identify a nonbank financial company for designation that does not have a system-wide impact, while overlooking other companies that could trigger broader financial instability."
Because the p&c industry business model is premised upon collecting sufficient premium in advance to fund covered claims, AIA said there is "less need to borrow and consequently a lower likelihood of becoming highly leveraged."
The letter adds, "When insurance companies do borrow, they generally do so through issuance of long-term debt or surplus notes in the public and sometimes private placement markets, for the purpose of long-term strategic positioning.
"They do not continuously tap very short-term funding vehicles such as commercial paper issuance for their day-to-day funding requirements."
AIA said the analytical or quantitative criteria for determining whether an industry imposes potential systemic risk should consider the nature of the financial activities of a specific industry as well as the business model utilized.
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