Insurers Contend They Are Not 'Systemically Risky,' Explain AIG Exception

NU Online News Service, Nov. 11, 1:12 p.m. EST

Property and casualty insurance companies "do not have the characteristics of a firm that pose a system risk," and therefore should not be subject to federal oversight, a coalition of large insurers told federal regulators.

The companies also sought to explain that problems at AIG that contributed to the financial crisis were not related to the company's p&c insurance operations.

Specifically, p&c insurers bear "none of the markers" of systemic importance, unlike commercial banks and investment banks, the group said in a letter to the federal regulators.

"The operational and regulatory models of p&c insurers are fundamentally different from those of commercial and investment banks, and this difference should be acknowledged by the Financial Stability Oversight Council (FSOC) in its rulemaking," the letter states.

The letter was written on behalf of the Property and Casualty Insurers Coalition, a group of six commercial and consumer property and casualty insurers.

The members are the ACE Group, Allstate Insurance Company, Liberty Mutual Group, Nationwide Insurance, State Farm Mutual Automobile Insurance Company, and United States Automobile Association.

The coalition 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 non-bank financial companies to heightened supervision by the Federal Reserve Board under the new Dodd-Frank financial services reform law.

In its letter, the coalition said its "primary theme is that traditional property and casualty insurance operations do not pose a threat to U.S. financial stability and do not warrant further consideration for designation" as systemically risky.

The letter also states that with the "singular exception of American International Group, p&c insurers were neither the cause of the recent financial crisis, nor did they experience material financial distress due to the crisis."

Moreover, the letter states, "In the case of AIG, its non-insurance operations created systemic risk, not its traditional p&c insurance operations."

The letter also notes that the standards for determining systemic risk should consider more than the size or scope of the business, and focus primarily on the kind and character of the activities engaged in and the degree to which those activities are regulated

"Car, home, and business insurance products provide protection against physical loss or liability arising from fortuitous events," the letter says. "P&c insurance products are not interconnected to other financial institutions in any way such that the failure of the insurer would trigger a chain of failures."

The letter adds that the "AIG example" suggests that non-traditional interconnected financial products may be offered in an unregulated entity within an insurance holding company system.

"It is in this respect that the FSOC should focus its energies to determine the nature of any such non-traditional activities and whether their nature and scale are of systemic importance," the letter said.

The letter also cautions that the Dodd-Frank bill is written with "bank regulatory and business model constructs in mind."

The letter states that "standards that focus on bank-centric ratios or metrics cannot be appropriately applied to p&c insurers. Thus, a holistic approach for reviewing a p&c insurer's operations is needed."

The letter continues, "In this way, p&c insurers that provide traditional insurance products and services will be distinguished in terms of the risk they pose to the financial system from banks or other financial institutions that engage in activities that pose a systemic risk."