Systemic Risk and the U.S. Insurance Sector

Abstract

This paper examines the potential for the U.S. 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 the U.S. insurers do not pose systemic risk. However, life insurers are vulnerable to intra-sector crises because of leverage and liquidity risk; and both life and property-casualty insurers are vulnerable to reinsurance crises arising from counterparty credit exposure. Non-core activities such as derivatives trading have the potential to cause systemic risk, and most global insurance organizations have exposure to derivatives markets. To reduce systemic risk from non-core activities, regulators need to develop better mechanisms for insurance group supervision.