Of the many unresolved questions of the financial crisis, the questions surrounding how best to mitigate systemic risk may well be the most abtruse.
While the Dodd-Frank Act birthed the
When it comes to systemic risk and insurers, much of the discussion revolves around how insurers' companies fit in to larger holding companies. While there is near-universal agreement that the traditional insurance business model itself does not present systemic risk, the activities of other units in an insurance group may.
“Recent history has shown that groups can be complex and opaque in nature,” Dr. Mary Weiss, Deaver Professor of Risk, Insurance, and Healthcare Management at Temple University said in testimony before the Senate Banking Committee this week. “Many groups are involved in noninsurance activities. These noninsurance activities may be regulated or they may not. Importantly these activities, especially if they are unregulated and involve capital markets, could make a group systemically risky (as was the case for AIG).”
Moreover, Weiss noted that U.S. insurance regulators at present do not have the authority to supervise these noninsurance activities. In addition to fomenting cross-industry risk, the complexities of the holding company structure also requires greater collaboration between lawmakers on an international basis.
Vaughan said that increased coordination among international insurance regulators will be necessary if or when an insurance group experiences financial distress. “In light of the financial crisis and the evolving insurer business model, insurance regulators recognize it is vital to improve coordination and collaboration to better supervise IAIGs, and we are developing structures and tools to better identify internal and external risks to the insurance sector,” she said.