Systemic Risk - Overview
Words and Concepts
- Asset Liquidation Transmission Channel
- Contagion, Contagion Analysis
- Credit Default Swaps (CDS)
- Credit market instruments
- 2014 CIPR/ JIR ?? Federal Reserve Paper
- 2020 SOA China Paper
- Macroprudential / Microprudential
- NTNI – Nontraditional and Non-insurance
- Shadow Banking / Shadow Insurance
- Shock, Market Shock
- Securities Lending
- Solvency / Insolvency
- Run on the Bank / Disintermediation
- Asset Concentration Risk
- C-2 Risk
- Conduct of Business Risk (COB)
- counterparty risk
- Credit Risk
- Cyber Risk
- Default Risk
- Disintermediation Risk
- Difficult to Measure Risk
- Durational Risk
- Emerging Risks
- Funding Risk
- Interest Rate Risk (C-3/Trowbridge Committee-SOA)
- Insurance Risks
- Investment Risk
- Lapse Risk
- Liquidity Risk
- Longevity Risk
- Misconduct Risk
- Mis-selling Risk
- Mortality Risk
- Maturity Mismatch Risk
- Non-Traditional Risks
- Operational Risks
- Policyholder Behavior Risk
- Pricing Risk
- Reputational Risk
- Solvency Risk (Insolvency)
- Systemic Risk
- Underwriting Risk
- 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)
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
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
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
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.
- Bank Deposits
- Stocks and Funds
- 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:
- 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., Vice President and Principal of the Tillinghast firm
1983 - INDIVIDUAL LIFE INSURANCE, Society of Actuaries