As the rulemaking phase of the Dodd-Frank Act continues, insurers are looking to shape the rules to determine which companies constitute a systemic risk to the larger economy.
Yesterday, the
In a letter to FSOC, AIA SVP and general counsel J. Stephen Zielezienski lauded FSOC’s inclusion of a transparent three-stage process to assess and determine sources of potential systemic risk, but asked for several revisions to the process. In Stage 1 of the process, which applies a series of quantitative metrics to non-bank financial companies, AIA recommends getting rid of certain metrics, such as gross notional credit default swaps outstanding. The letter also recommends that the FSOC be allowed to depart from the Stage 1 metrics only in extraordinary circumstances.
For Stage 2, Contextual Evaluation of Companies Based on Available Data, AIA recommends that the FSOC acknowledge the uniqueness of the insurance business model. “AIA believes that, if the final rule emphasizes risk-related factors and applies them in context, they will conclude that regulated property/casualty insurers present little, if any, systemic threat,” Zielezienski states.
Indeed, the letter furnishes examples of where failures of large insurance companies did not result in financial contagion. “Major insurance insolvencies both here and abroad reinforce Congressional judgment that property/casualty insurance companies do not pose a systemic risk that requires creation of an alternative in the United States to make certain that the resolution process is orderly,” the letter states. “Some observers pointed to the March 2001 collapse of Australian insurance giant HIH Insurance Group as a prime example of insurance systemic risk. Yet, careful examination of the aftermath of the HIH failure demonstrates that it produced only temporary disruption in Australian insurance markets, not an abrupt and cascading effect on other financial sectors and the larger economy.”
