Introduction: Symposium on Convergence, Interconnectedness, and Crises: Insurance and Banking

Abstract

A conference on Convergence, Interconnectedness, and Crises: Insurance and Banking was held at Temple University in Philadelphia from December 8 to 10, 2011. The conference was cosponsored by Temple University's Advanta Center for Research on Financial Institutions, SCOR Group, The Canada Research Chair in Risk Management, HEC Montreal, CIRPEE (Quebec, Canada), and The Journal of Risk and Insurance. Seventeen research papers and two keynote addresses were presented at the conference, and six papers from the conference are published in this symposium. The conference key note addresses were delivered by Denis Kessler, Chairman and CEO of SCOR Group, and Andrew W. Lo, Harris & Harris Group Professor of Finance, MIT Sloan School of Management. The Financial Crisis of 2007-2010 revealed significant interrelationships both within and between the insurance and banking industries that contributed significantly to the magnitude of the crisis and the resulting government bailout. The need for additional research on interconnectedness provided the motivation for the Conference. The objective was to help minimize or avoid future crises through careful scholarly explorations of these interconnections. Researchers from around the world spent 3 days delving into numerous insurance and banking topics, ranging from systemic risk to implications of financial services mergers to extreme correlations within the insurance industry. The introductory article in this symposium, by Denis Kessler, is based on his keynote speech at the Conference. In his article, Kessler argues that the (re)insurance industry is not a significant source of systemic risk. Kessler emphasizes that (re)insurance failures are very rare, orderly, long-term processes, unlike banking crises, which are short term and associated with panics. He points out that a failing (re)insurance company does not terminate its contracts overnight but continues to settle claims. Thus, (re)insurance failures do not require sudden liquidation of assets and liabilities, as in the case of many banking failures. One reason that banks are susceptible to systemic risk is the interbank lending market, where risk is strongly concentrated due to a network of very short-term, bilateral exposures. In contrast, the structure of the (re)insurance market is hierarchical, in the sense that primary insurers cede a single risk to many other reinsurers, which in turn often cede it to different retrocessionnaires. In contrast to retail bank deposits and wholesale market bank funding, (re)insurance reserves are not instantaneously puttable and thus cannot be redeemed on demand by policyholders. Also unlike banks, which tend to borrow short term and lend long term, (re)insurers' asset and liability maturities tend to be well matched. Therefore, regulators should resist the temptation to put (re)insurers in the same category as banks and other financial institutions. Neither insurers nor reinsurers create significant systemic risk. Therefore, Kessler argues, designating (re)insurers as systemically important financial institutions (SIFIs) would reduce insurers' and reinsurers' profitability at the expense of solvency. The second article in the symposium is a macro-overview analysis of systemic risk in the insurance industry by J. David Cummins and Mary A. Weiss. Their article examines the potential for the U.S. insurance industry to cause systemic risk events that spill over to banking or other segments of the economy. They examine primary indicators of systemic risk as well as contributing factors that exacerbate vulnerability to systemic events. The evaluation of systemic risk is based on a detailed financial analysis of the insurance industry, its role in the economy, and the interconnectedness of insurers. Insurers are shown to have very low default risk and low susceptibility to financial crises. However, life insurers have higher leverage and more exposure to asset-backed securities and illiquid privately placed bonds than property-casualty (P-C) insurers. …