From Business Insurance:

As regulators consider exactly which institutions present a systemic risk under the Dodd-Frank Wall Street Reform and Consumer Protection Act, they ought to consider the comments recently sent to the International Association of Insurance Supervisors by the Washington-based R Street Institute.

R Street is a free market-oriented nonprofit that doesn’t shy away from offering provocative solutions to public policy issues, including financial regulation and environmental affairs. In its comments, R Street notes that private insurers aren’t the only players in the property/casualty insurance market. State-controlled entities such as Florida’s Citizens Property Insurance Corp. and others also provide coverage.

In the comment, R Street senior fellow R.J. Lehmann noted that the IAIS considers “interconnectedness” as one of the two most important factors used to access the systemic importance of an insurer.

“The typical post-catastrophe funding mechanisms of large U.S. residual market entities must raise concerns about interconnectedness,” he wrote. “Rather than setting aside actuarially appropriate reserves to prepare for the risks they take on, entities like Florida Citizens rely on post-event borrowing as a source of liquidity after a major event. The loans taken out by these entities are then to be serviced over time using funds raised by assessments on private market insurers, which are then typically passed on to consumers.”

Mr. Lehmann said the case for closer regulatory oversight of these entities “is bolstered by the potential for regulatory conflicts of interest” and noted that, in some states, the state-controlled entities are overseen by the same regulators who oversee private insurers.

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