Systemic Risk

  • Assimilation of banking-type activities by life insurers appears to be the key systemic vulnerability.

2003 - IMF - Insurance and issues in financial soundness. IMF working paper 03/138. Das U, Davies N, Podpiera R - 44p

  • 2009 0305 - GOV (House) - Perspectives on Systemic Risk, Paul Kanjorski (D-PA)  ---  [BonkNote]
    • Terri Vaughan (NAIC - CEO)
  • (p93) - Large troubled life insurers can also generate systemic risks if policyholders run to cash out their life insurance policies, or if the millions of retirees who rely on annuities suddenly learn that their contracts may not be honored sharply curtail their spending as a result. 

--  Prepared Statement of Martin Neil Baily Senior Fellow, Economic Studies Program, The Brookings Institution, And Former Chairman Of The Council Of Economic Advisers Under President Clinton, And Robert E. Litan1 May 6, 2009

2009 0506 - GOV (Senate - Banking, Housing, and Urban Affairs) - Regulation and Resolving Institutions Considered "Too Big to Fail" - [PDF-121p, VIDEO-Senate]

  • 1989 - SOA - 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 - SOA - 11th Survey of Emerging Risks, Society of Actuaries - 138p

  • 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.

2010 – Senate / CRS - Tax Expenditures: Compendium of Background Material on Individual Provisions - Committee On The Budget United States Senate, Prepared by the Congressional Research Committee – 1002p

  • 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-KC - Restructuring the Financial System - [link-page]

  • 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 - Book - 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 0305 - GOV (House) - Perspectives on Systemic Risk, Paul Kanjorski (D-PA)  ---  [BonkNote] - -> Vaughan, Therese (NAIC CEO), Carolyn Malony (NY) - 
  • Insurance and Systemic Risk) - Paul Kanjorski (D-PA)  ---  [BonkNote]
  • 2010 - CIPR / NAIC - 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 - 40p
  • 2013 05 - IAA - Actuarial Viewpoints on and Roles in Systemic Risk Regulation in Insurance Markets, International Actuarial Association - 46p
  • 2014 - LR - Regulating Systemic Risk in Insurance, by Daniel Schwartz - 73p
  • 2016 - JIR / NAIC / FRB-B - A Post-Mortem of the Life Insurance Industry's Bid for Capital During the Financial Crisis, by Michelle L. Barnes, James Bohn, Cynthia L. Martin, Federal Reserve Bank of Boston - 41p
  • 2016 0831 - MorningConsult - Life Insurers Do Not Pose a Systemic Risk to the Nation’s Economy, By Dirk Kempthorne, president and chief executive officer of the ACLI - [link]
  • 2017 - SOA - Reviewing Systemic Risk within the Insurance Industry, Society of Actuaries - 32p
  • 2018 0412 - CRS - Regulatory Reform 10 Years After the Financial Crisis: Systemic Risk Regulation of Non-Bank Financial Institutions, by Jay B. Sykes, Legislative Attorney, Congressional Research Service - 54p
  • 2018 - SOA - 11th Survey of Emerging Risks, Society of Actuaries - 138p
  • 2020 02 -  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 -  SOA - Systemic Risk in China’s Insurance Industry, Society of Actuaries - 55p

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

1983 - SOA - Individual Life Insurance, Society of Actuaries - 22p