By David A. Sampson - 04/27/09 06:14 PM EDT
The Property Casualty Insurers Association of America (PCI) fully agrees. In fact, we have been saying for months that systemic risk in the financial services sector is the top issue that the federal government must address. Our leaders must not be sidetracked by other issues that have been ongoing for decades and have no immediate resolution. The results of the debate over federal-vs.-state regulation of insurance, for example, will do nothing to ease the overall economic crisis, which largely occurred because of a series of interconnected market failures.
To expand on this definition, we think it is incorrect to say a company poses systemic risk because it is “too big to fail.” The correct measure, we believe, is “too interconnected to fail.” A large insurer may pose no systemic risk, while a small, interconnected financial company may have a profound impact on the overall market because its failure would create a systemic ripple effect.
That leads me to my next point, which is that traditional property-casualty insurance companies are not generally so interconnected that they pose a systemic risk. They do not create any counter-party risk and their exposures are not correlated with other systemic waves or economic cycles. For instance, a downturn in the economy does not necessarily lead to more auto insurance claims. Additionally, there are many competing auto insurance suppliers, so the failure of even a very large international auto insurer would have minimal sequential systemic risk impact. Even now, the vast majority of property-casualty companies are well capitalized and solvent, continuing to provide ample coverage in open markets.
To address the economic crisis, restore investor confidence, and prevent another economic disaster from recurring, PCI advocates the creation of a systemic risk overseer within the Federal Reserve Board (FRB). However, the FRB’s systemic risk oversight should be completely separate from other bank holding company oversight powers. Jurisdiction would include any institution engaged in financial activities that in aggregate present a significant systemic risk. Also included would be any financial institution that submits to federal systemic risk oversight, such as for international equivalency treatment.
These proposals are practical solutions, and solving the systemic risk crisis does not require a vast new regulatory bureaucracy.
In creating a systemic risk overseer, it is crucial to not confuse solvency with systemic risk. Solvency regulation is done by functional regulators to ensure that companies have sufficient capital to meet their obligations. Systemic risk oversight would prevent holding company failures from contaminating other markets and the larger economy. Merging solvency regulation into systemic risk oversight would only create a “too big to fail” regulator, and as we have noted, this is not the best measurement. Solving the systemic risk crisis does not require a vast new regulatory bureaucracy.
PCI stands ready to work with our nation’s leaders to develop a viable resolution that will stabilize our economic markets and keep another such crisis from happening again.
Sampson is the president and chief executive officer of the Property Casualty Insurers Association of America (PCI), which represents more than 1,000 member companies that write 40 percent of the nation’s property and casualty insurance.