Systemic Risk and the Insurance Industry

Abstract

This chapter examines the potential for the US insurance industry to cause systemic risk events that spill over to other segments of the economy. We examine primary indicators that determine whether institutions are systemically risky as well as contributing factors that exacerbate vulnerability to systemic events. 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. The primary conclusion is that the core activities of US insurers do not pose systemic risk. However, life insurers are vulnerable to intra-sector crises; and both life and property-casualty insurers are vulnerable to reinsurance crises arising from counterparty credit risk. Noncore activities such as financial guarantees and derivatives trading may cause systemic risk, and interconnectedness among financial institutions has grown significantly in recent years. To reduce systemic risk from noncore activities, regulators need to continue efforts to strengthen mechanisms for insurance group supervision, particularly for multinational groups.