Systemic Risk - Overview

Words and Concepts

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

 

2008 - SOA - Risk Management: The Current Financial Crisis, Lessons Learned and Future Implications, Society of Actuaries - 104p

2009, 03/05 - GOV - Perspectives on Systemic Risk - House FINANCIAL SERVICES Committee (SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED ENTERPRISES) -> Vaughan, Therese (NAIC CEO), Carolyn Malony (NY) - 

2009, 06/16Insurance and Systemic Risk, House Financial Services Committee

2010 - NAIC CIPR - Systemic Risk and the U.S. Insurance Sector, Mary A. Weiss, Ph.D., Distinguished Scholar Center for Insurance Policy & Research, National Association of Insurance Commissioners

2013, May - Actuarial Viewpoints on and Roles in Systemic Risk Regulation in Insurance Markets, International Actuarial Association

2014 - Law Review -  Regulating Systemic Risk in Insurance, Schwartz - 73p

2016 - FRB of Boston - A Post-Mortem of the Life Insurance Industry’s Bid for Capital During the Financial Crisis, Journal of Insurance Regulation

2016, 08/31 - Life Insurers Do Not Pose a Systemic Risk to the Nation’s Economy, BY DIRK KEMPTHORNE (president and chief executive officer of the ACLI

2017 - SOA - Reviewing Systemic Risk within the Insurance Industry, Society of Actuaries - 32p

2018/04/12 - CRS - Regulatory Reform 10 Years After the Financial Crisis: Systemic Risk Regulation of Non-Bank Financial Institutions, Jay B. Sykes, Legislative Attorney

2020 - SOA - Systemic Risk in China's Insurance Industry, Society of Actuaries - 55p

  • 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