NAMIC today released its latest Issue Analysis paper, “The Financial Crisis, Systemic Risk, and the Future of Insurance Regulation,” authored by the noted insurance economist Scott E. Harrington, Ph.D. Harrington is the Alan B. Miller Professor of Health Care Management and Insurance and Risk Management at the Wharton School of the University of Pennsylvania.
The paper provides an overview of the causes of the financial crisis and the failure of American International Group, while simultaneously exploring the sources of systemic risk, whether insurance poses systemic risk, and whether a systemic risk regulator is needed for insurers.
Harrington finds that systemic risk is relatively low in insurance markets – especially property/casualty insurance markets – when compared with banking, in part because insurers hold greater amounts of capital in relation to their liabilities, reducing their vulnerability to shocks in the economy.
The paper confirms the validity of NAMIC’s message that the property/casualty insurance industry played no role in the worldwide financial crisis, notwithstanding the anomaly of AIG. Furthermore, the paper points out that nothing about the crisis justifies the creation of a systemic risk regulator with authority over insurers and non-bank institutions. Noting that federal regulators failed to anticipate or prevent the near collapse of Citibank, Bank of America, and other bank and investment bank holding companies, Harrington observes that “it’s just as likely or more likely that federal regulation of large insurers would have further increased risk.” Creation of a systemic risk regulator for insurers and other non-bank institutions “would very likely undermine market discipline and protect even more institutions, investors, and consumers from the downside of risky behavior,” Harrington concludes.
The release of the Harrington paper comes at a crucial time as Washington wraps up the debate over health care reform and turns to the reform of financial services regulation in earnest. NAMIC will distribute this Issue Analysis to key lawmakers on Capitol Hill as a part of our continuing effort to help lawmakers understand that property/casualty insurers and state insurance regulation bear no responsibility for the financial crisis, and to warn of the negative consequences that could ensue if insurers are subject to federal regulation intended to curtail “systemic risk.”
Direct questions to NAMIC's Vice President of Public Policy Robert Detlefsen, Ph.D.