By CYRIL TUOHY, managing editor of Risk & Insurance®
The failure of an insurance company would not have a systemic, long-term impact on the economy, a new study commissioned by the property/casualty insurance industry has found. Instead, robust competition in the marketplace means new companies exist to supply the market in the event of a collapse.
Insurance carriers' conservative investment portfolios and the industry's framework for reimbursing policyholders in the event a firm goes belly-up contribute to the guaranty that policyholders are eventually paid, the study also found.
In addition, the fact that policyholders cannot demand immediate payment from an insurer means there can be no "run on the bank," according to the study by the law firm of Steptoe & Johnson LLP.
"Home, auto and business insurers do not pose a systemic risk," the authors of the Steptoe & Johnson study wrote.
The findings of the study, titled "Systematic Solution not Systemic Problem," is the latest effort by the Property Casualty Insurers Association of America (PCI) to convince international regulators that insurance carriers don't deserve to be under the same federal rules as banks.
"PCI continues to lead efforts to produce a more effective and efficient regulatory system and avoid duplicative regulatory authority and unnecessary burdens on U.S. companies and their customers," said Robert Gordon, PCI's senior vice president of policy development and research, in a statement. "Our new study is a key component to our ongoing outreach to global financial sector policymakers."
The results of the PCI-commissioned study were presented to the Basel, Switzerland-based International Association of Insurance Supervisors (IAIS) meeting last week on the island of Macao.
The IAIS believes insurance companies can generate systemic risk "in certain circumstances," particularly with nonregulated units within an insurance company, the effects of which are only always months or years later.
"Recent experience has demonstrated unequivocally that non-regulated entities are a key
issue of concern," the IAIS said, in a 2009 note to members.
Stateside, a powerful coalition of property/casualty insurers have been fighting to persuade regulators to exclude them from a list of companies considered to be too large to fail or which would put the financial system at risk if they collapsed.
The so-called Property and Casualty Insurers Coalition includes ACE Group, Allstate Insurance Co., Liberty Mutual Group, Nationwide Insurance, State Farm Mutual and the United Services Automobile Association.
Institutions categorized as such would be required to hold more capital in reserve under the Dodd?Frank Wall Street Reform and Consumer Protection Act, signed into law last year in the wake of the financial crisis of 2008. The more money an institution holds in reserve, the less it has to develop new products and services for new markets.
Critics of Dodd-Frank fear the law gives the government unprecedented powers over the insurance industry, which by and large contributed very little to the near-collapse of the financial system.
Insurer AIG, which sold insurance on mortgage-backed securities through what turned out to be a unit with very little oversight, quickly became the poster-child for the unregulated financial excesses leading to the Great Recession.
While AIG almost collapsed and had to be bailed out by taxpayers, the vast majority of U.S. property/casualty insurers, which are tightly controlled by state insurance regulators, survived the recession intact.
"It is only in the dark, unseen corners, outside the core property/casualty insurance operations, that a large insurance holding company could engage in activities that could create systemic risk," the PCI report said.
June 21, 2011
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