Legislator, Industry Experts Question Interpretations Of ‘Systemically Risky’

But, he added, "the moral hazard implications of this designation cannot be overstated. The stamp of 'systemically important' will be interpreted by many market participants as a designation of 'too big to fail,' prompting them to exercise less market discipline when dealing with such firms.

In statements issued during the hearing, officials of various industry trade groups voiced the same concerns.

At the same time, industry officials said in statements related to the hearing that the FSOC is not doing enough nor does it have the expertise available at the moment to distinguish money-center banks from insurers.

Leigh Ann Pusey, president and CEO of the American Insurance Association, says she supported testimony at the hearing by John Huff, Missouri's insurance commissioner, that insurance is unique and fundamentally different than banking and other financial services.

She also says that the insurance industry believes the Dodd-Frank law expressly "took necessary steps to prevent insurers from being included in the many bank-focused provisions of the new law—steps that must be carried through the regulatory implementation phase."

Pusey states, "Given the FSOC's extensive authority and the potential impact to any [property and casualty] insurance company that may be designated as systemically risky, it is critical that these differences be recognized and reflected in the rules that FSOC adopts."

In another comment, the Insurance Information Institute (I.I.I.) discloses that it has prepared a white paper that seeks to a draw bright line between the risk profiles of large banks and insurers.

The white paper issued by the I.I.I. argues that the risk-management practices at U.S. auto, home and business insurers are superior to those that were in place at most banking institutions throughout the 2008-2009 economic downturn. As a result, the P&C insurance industry as a whole poses no systemic risk to the world's financial system, the paper says.

 The paper was written by Robert Hartwig, I.I.I. president, and Steven Weisbart, I.I.I. senior vice president and chief economist.

"While no one disputes the need for better oversight of lightly or unregulated firms that can shake the foundations of our financial system, the FSOC must employ sound economic principles in the identification of systemically important firms," Hartwig says.

 "At least when it comes to the [P&C] insurance industry—the companies that sell auto, home and business insurance—the FSOC may mistakenly believe that size and size alone is a sufficient criterion for identifying systemic importance," Hartwig notes.

"Yet, irrespective of size, it is difficult to see how companies that sell protection against losses arising from such things as auto accidents, kitchen fires and lawsuits from slip-and-fall accidents could ever be construed as systemically risky," the paper contends.