Systemic Risk and Regulation of the U.S. Insurance Industry

This paper analyzes the characteristics of U.S. insurers for purposes of determining whether they are systemically risky. More specifically, primary factors (size, interconnectedness, and lack of substitutability) and contributing factors (leverage, liquidity risk and maturity mismatch, complexity and government regulation) associated with systemic risk are assessed for the insurance sector. A distinction is made between the core activities of insurers (e.g., underwriting, reserving, claims settlement, etc.) and non-core activities (such as providing financial guarantees). Statistical analysis of insurer characteristics and their relationship with a wellknown systemic risk measure, systemic expected shortfall, is provided. Consistent with other research, the core activities of property-casualty insurers are found not to be systemically risky. However, we do find evidence that some core activities of life insurers, particularly separate accounts and group annuities, may be associated with systemic risk. The non-core activities of both property-casualty and life insurers can contribute to systemic risk. However, research findings indicate that generally insurers are victims rather than propagators of systemic risk events. The study also finds that insurers may be susceptible to intra-sector crises such as reinsurance crises arising from counterparty credit risk. New and proposed state and federal regulation are reviewed in light of the potential for systemic risk for this sector.