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

Abstract

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 well-known 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.

A Post-Mortem of the Life Insurance Industry's Bid for Capital During the Financial Crisis

“…7. Cummins and Weiss (2014) show that life insurers more involved in writing group annuity business are more likely to score higher on the market-based measure of systemic risk, SRISK, developed by Acharya et al (2010).…”

Macro investigation on China's engineering insurance industry: based on industrial organization theories

“…Prior studies have made important and unique contributions to the literature on market structure-performance in the insurance sector. However, researchers have pointed out that market concentration in certain insurance lines may be disguised by the overall market measures (Cummins and Weiss, 1992) and the findings of the overall industry may not apply to a certain insurance line (Carroll, 1993). Thus, research based on line-specific measures is necessary.…”

“…As engineering insurance is heavily influenced by the nature of construction activity, it is characterized by high risk, complex risk factors, multi-stage, multi-insured and comprehensive insurance coverage (Liu et al, 2007(Liu et al, , 2018Anchen et al, 2018). The findings of the overall insurance (or life/non-life insurance) market may not apply to engineering insurance (Cummins and Weiss, 1992;Carroll, 1993). Therefore, it is crucial to conduct a macroscopic study on the engineering line to investigate this specific insurance industry, which is the motivation of this study.…”

The Determinants and Implementation of Risk-Based Capital on the Financial Performance of Insurance Companies in Indonesia

“…The purpose of government in applying the risk-based capital method is not only to protect the interests of the public as insurance policyholders, but also to adjust to the development of national insurance industry. Cummins and Weiss (2014) stated that the US system that uses RBC as a solvency indicator disregards operational risk, catastrophe risk and qualitative criteria, such as risk management systems and corporate governance. Therefore, their research indicated that RBC is not an accurate predictor of insurance solvency.…”