Systemic Risk - Overview

  • 1989 - Guaranteed Returns - A Tragedy of the Commons! - by Donald R. Sondergeld, Society of Actuaries - 4p
  • Unknown unknown risks are the Black Swans, things that happen but cannot be prepared for.
  • Unknown knowns are another form of emerging risk that reflects ignorance of the future.
  • This can reflect instances where historical data is not predictive, but also includes risks without data where a practitioner or theorist is not able to provide useful techniques to analyze the risk in the future.
  • A risk may be an unknown known for one analyst and a known known for another. (p5)

2018 - 11th Survey of Emerging Risks, Society of Actuaries

  • Cash value life insurance can operate as an investment vehicle that combines life insurance protection with a financial instrument that operates similarly to bank certificates of deposit and mutual fund investments.

Senate Committee Print 109-72 - TAX EXPENDITURES Compendium of Background Material on Individual Provisions109th Congress (2005-2006)

https://www.govinfo.gov/content/pkg/CPRT-111SPRT62799/pdf/CPRT-111SPRT62799.pdf

  • The life insurance industry has moved over time from a traditional business involving the selling of life insurance and investing the proceeds in a mix of mortgage loans and investments, to a much greater emphasis on single premium deferred annuities, which closely resemble term deposits at the other institutions, and a more diversified portfolio of assets.

1987 - FRB - RESTRUCTURING THE FINANCIAL SYSTEM

Federal Register - ‘‘Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies’’, 12 CFR Part 1310
RIN 4030–ZA00 <2012 - 77 Fed. Reg. 21,637>

Effects of the Panic of 1857

  • The Ohio Life and Trust Company of Cincinnati failed in 1857 due to banking speculations, and while it had discontinued its insurance business sometime previous, the magnitude of its trust and banking operations in the West was so great that its fall did much to precipitate the general financial panic which began there and spread rapidly over the entire country.  (p116-117)

1920 - The History of Life Insurance in the United States to 1870: With an Introduction to Its Development Abroad, Charles Kelley Knight - 217p

  • The above four factors are the major influencing factors of systemic risk in China’s insurance industry.
    1. Bank Deposits
    2. Bonds
    3. Stocks and Funds
    4. Other Investments
  • All of these will result in the inadequacy of the liquidity of insurers’ assets, serious solvency problems and large capital shortfalls.
  • Owing to systemic contagion, the insolvency of one insurer is likely to lead to the bankruptcy of other insurers that have an economic connection with it directly and further spread to the whole industry.  (p12)

2020 02-  Systemic Risk in China’s Insurance Industry, Society of Actuaries

VALUATION OF ASSETS AND LIABILITIES
1984-1, NAIC Proceedings, (p265-266)

The changes in the nature of the insurance industry over the past several years, both in terms of product  diversification and asset diversification, has created considerable stress on the  regulatory control mechanisms. 

Some  of  the  symptoms of  the problem  are:

  1. Increased leveraging of insurance companies through  long-term interest rate guarantees on an increased scale.
  1. Corporate diversification programs with broader activities through larger networks of subsidiaries and affiliated organizations.
  1. The growth of new investment vehicles such as options, interest rate futures, partnerships and equity  investments in oil and gas deals, real estate, etc.
  2. Sales or transfers of loss reserves. 
  1. Complex reinsurance arrangements.
  1. Tighter margins in the premiums charged to customers,  which places strains on profitability.
  1. The growth of interest-sensitive  insurance  products, such as universal life, spurred by a period of high  inflation and historically high interest rates. 
  1. Weakening and/or inadequate surplus positions.

Although by no means an exhaustive list,  these problems  do  highlight the need to take a comprehensive look at the financial control mechanisms used in the regulation of the  insurance  industry.

  • The four horsemen threatening the life insurance industry's survival are taxation, expenses, replacement, and inflation.

--  WILLIAM R. BRITTON, JR., Vice President and Principal of the Tillinghast firm

1983 - INDIVIDUAL LIFE INSURANCE, Society of Actuaries