Core Business

By contrast, the core business of an insurance company is transferring and pooling risk.258

  • If premiums are prepaid, this does not necessarily entail any short-term borrowing.
    • That means that the risk that an insurance company will have to sell large quantities of assets is smaller.
  • This is not to say that insurance companies face no liquidity risk at all.
    • AIG faced a severe liquidity problem, not just in its parent company, but apparently also in its regulated life insurance subsidiaries.259
  • And it has been recognized for some time that life insurers that issue policies that accumulate large surrender values can become vulnerable to runs.260
  • But it  seems that liquidity risk – the great villain of the recent crisis – is a larger concern for banks than for insurance companies.261
    • That suggests that credit risk is a relatively bigger problem for an insurance company than a bank.

256 See Xavier Freixias & Jean-Charles Rochet, Microeconomics of Banking 4-5 (1997).

257 See Gary B. Gorton, Slapped By The Invisible Hand:  The Panic of 2007, 47-50 (2010) (describing how decreased willingness to accept structured debt as collateral led to asset sales, falling prices, and systemic insolvency).

258 See Jeffrey Carmichael & Michael Pomerleano, The Development and Regulation of Non-Bank Financial Institutions 81 (2002).

259 See supra note 159 and accompanying text.

260 See Vaughan &Vaughan, supra note 1, at 274-75.

261 See Guillaume Plantin & Jean-Charles Rochet, When Insurers Go Bust 2(2007).  

2010 - LR - Rating Dependent Regulation of Insurance, John Patrick Hunt, Connecticut Law Journal - p101-186p - 303p

  • 2014 0909 - GOV (Senate) - Wall Street Reform: Assessing and Enhancing the Financial Regulatory System, Financial Regulatory System (CSPAN)
    • [PDF-177p, VIDEO-CSPAN] - <Bonk: mp3, mp4>
    • (p24) Mr. TARULLO.
      • So, Senator, I guess I would draw a distinction between the creation of capital standards for traditional or current insurance activities, on the one hand, and an assessment of systemic risk on the other.
      • My own reading of the FSOC process with respect to Prudential and AIG is that there is not a lot of concern about the core insurance activities of those companies.
      • The concerns were with respect to some nontraditional insurance activities where runnability is more of a concern, and also with respect to things that are not insurance activities of any sort.
      • I think that is where the analysis would allow one to conclude there is systemic importance.
      • I personally do not think that the issue of whether there is systemic importance in traditional insurance activities has really been broached, and I am personally not sure we need to broach it.
      • I mean, my pretty strong presumption would be that there is not.
    • Senate - Committee on Banking, Housing and Urban Affairs