Government sources of systemic insurable risk
In mid-2013, three years after the Dodd-Frank Act’s passage, American International Group Inc. and Prudential Financial Inc. became the first insurance companies to be designated by the Financial Stability Oversight Council as non-bank financial companies that were nonetheless “systemically important financial institutions.” MetLife Inc., which had been regulated as a bank holding company prior to divesting all of its banking operations, is widely expected to become the third.
FSOC is the “college of regulators” created by Dodd-Frank and granted broad powers under the law to police systemic risk in the financial system, including heightened government scrutiny of designated firms. In conjunction with a similar designation process currently underway internationally by the G-20 countries, in consultation with the International Association of Insurance Supervisors, the move by FSOC made clear that the business of insurance – in the United States, historically regulated at the state level –would be treated as a potential source of risk to the broader financial system.
This sea change has caused considerable consternation among industry leaders, who understandably fear both draconian regulatory oversight and the imposition of bank-centric rules that do not fit the needs and challenges of insurance markets. The property/casualty industry has been particularly adamant that their sector is not a source of systemic risk and that P&C insurers should not come under the rubric of any systemic risk regulatory regime.
While it is true that the business of P&C insurance is not generally systemically risky, there have been notable exceptions where the excessive concentration of insured or insurable P&C risks has threatened the broader economy. At the same time, regulators continue to pay insufficient attention to some genuine sources of systemic risk: namely, the accumulation of excessive insurable property/casualty risks within some state and federal enterprises.
This paper takes a look at some of those hidden, heretofore unquantified risks, with particular attention to the ways U.S. taxpayers are exposed to risks that should properly be borne by the global insurance industry.