I Am Going To Agree With Insurance Companies
Rarely do I completely agree with casualty insurance companies on a broad subject. This is one time that I have to make an exception. I do agree that insurance carriers do not pose a systemic risk to the US financial systems.
Systemic Risk – Two Definitions
1. In finance, the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system.
2. Financial system instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries”. It refers to the risks imposed by interlinkages and interdependencies in a system or market, where the failure of a single entity or cluster of entities can cause a cascading failure, which could potentially bankrupt or bring down the entire system or market.
Systemic Risk is also sometimes erroneously referred to as “systematic risk” It is not possible to avoid systemic risk through diversification.
Why did I decide to go into definitions on systemic risk? The Federalization of Insurance – specifically Workers Compensation from a different angle is now in Congress. The Federal Government wants to rein in insurance companies by regulating them with the same laws as banks.
A letter signed by various large insurers’ executives was delivered to Sen. Christopher Dodd, D-Conn., the banking committee chairman, as a precursor to bipartisan financial services reform legislation that could be introduced in the Senate this week.
I will not go into the letter except the passage “Property and casualty insurers have been an oasis of relative stability, weathering the crisis well without presenting any risk to the broader financial system.” One of the main concerns of the recently formed Property & Casualty Leaders Coalition was having to pay some sort of tax that was centered on the bank failures. Also in the letter was “The property and casualty industry should not be charged any assessments to cover shortfalls that arise from a resolution of a non-insurance financial company.”
The gravity of the situation can be shown by who signed the letter. The letter was signed by Evan Greenberg, chairman and CEO of the ACE Group; Thomas Wilson, chairman, CEO and president of Allstate Corp., John Degnen, vice chairman and chief operating officer of Chubb Corp.; Thomas Motamed, president and CEO of CNA Corp.; Edmund Kelly, chairman, president and CEO of Liberty Mutual Group; Stephen Rasmussen, CEO of Nationwide Mutual Insurance Co.; Edward Rust, chairman, president and CEO of State Farm Mutual Automobile Insurance Co.; Jay Fishman, chairman and CEO of the Travelers Cos. Inc.; Stuart Parker, president and CEO of USAA Property and Casualty Insurance Group; William Berkley, chairman and CEO of W.R. Berkley Corp.; and Paul Hopkins, CEO-Americas of Zurich Financial Services Group.
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