Are Insurers Systemically Significant?

As the U.S. Department of the Treasury's Financial Stability Oversight Council labors to craft its formula regarding systemic risk, the American Academy of Actuaries is proposing a series of metrics to assist in the process.

In a letter to the FSOC, Jesse Schwartz, chair of the Financial Regulatory Reform Task Force for the American Academy of Actuaries, said for each phase of the rulemaking process of the Dodd-Frank Act, metrics should be established. Furthermore, Schwartz contended these metrics should be dynamic and reflect the uniqueness of the insurance industry.

“A reason for the relative soundness of the insurance sector relates to the fundamental nature of insurance companies and their business models in addition to the relatively conservative functional regulation, whose primary focus is on preserving the solvency of the industry and protecting consumers,” the letter states. “However, the Council is charged with the responsibility to ensure that Federal regulators are aware of any changes in the overall soundness of the insurance industry that could affect the soundness of the U.S. economy. Metrics developed for this purpose, to identify systemically relevant individual insurance companies and groups of companies, should aid in providing indication of whether there have been any material or paradigm shifting changes to the risk profiles of systemically relevant companies.”

Elsewhere, the letter proposes a series of detailed metrics regarding size, interconnectedness and risk assumption and notes the importance of assessing systemic risk. “Those companies identified as being systemically risky should be evaluated for financial strength and the completeness of their functional regulation and the rigor of their risk management processes,” the letter states. “This process will be a complex undertaking involving quantitative and qualitative analyses based on public as well as non-public/proprietary information.”

The importance of the risk designation to insurers was evident in the industry’s response yesterday to the news that a voting insurance expert, Roy Woodall, had been nominated to the FSOC.

North American regulators are not the only ones looking to address systemic risk. In a research note, S&P notes that later this year, the Group of Twenty's Financial Stability Board will announce which entities it has designated as systemically important financial institutions on a global basis (G-SIFIs). “While we expect that most G-SIFIs will be banks, some insurers may also be in the frame,” S&P states.