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Jessica Hanson
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Phone:
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202-286-5446
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Jessica.hanson@pciaa.net
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PCI Unveils New Study: Systematic Solution, Not Systemic
Problem
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WASHINGTON – The Property Casualty Insurers Association
of America (PCI) today unveiled the findings of a new study, "Systematic
Solution not Systemic Problem - Distinguishing Insurance Market Risk from Systemic
Importance" that will be presented to the International Association of Insurance
Supervisors (IAIS) as it addresses global systemic risk regulation. The study
finds that the failure of a hypothetical major U.S. property casualty insurer
would not have a systemic effect on financial markets or the broader economy.
“While we remain involved in the deliberations over how
federal regulators implement the Dodd-Frank Act here in the United States, it
is also critical to be heavily engaged at the international level,” said Robert
Gordon, PCI’s senior vice president of policy development and research. “PCI
continues to lead efforts to produce a more effective and efficient regulatory
system and avoid duplicative regulatory authority and unnecessary burdens on U.S.
companies and their customers. Our new study is a key component to our ongoing
outreach to global financial sector policymakers.”
PCI recently engaged Steptoe & Johnson LLP, a
renowned international law firm, to consider the potential systemic effects of
the failure of a major insurer. The new PCI study will be presented to the IAIS
as it works with the Financial Stability Board (FSB) to decide whether insurers
should be subject to extra regulation as “global systemically important
financial institutions” (G-SIFIs).
The findings identify common misconceptions over the
differences between temporary market disruption and systemic impact. While the
two concepts are coterminous to an extent for very large banks, the application
is very different for insurers. According to the study, a major property
casualty insurer's failure would not have a systemic impact on the economy for
the following reasons:
·
Steady policyholder demand for products and the fact that
policyholders cannot immediately demand payments means there can be no “run on
the bank”;
·
P/C markets are highly competitive and unconcentrated, so there
is high “substitutability” – competitors will rush in to provide coverage in
case of a failure;
·
When necessary, industry/government concerted action has
addressed market impacts;
·
The state insurance insolvency process protects claimants and
external markets;
·
The U.S. guaranty fund system makes sure claimants will be paid;
·
The slow winding-down process means assets are liquidated in
orderly manner, avoiding potential stress to asset markets; and
·
Parent companies are insulated from effects of catastrophe losses.
“PCI is presenting the new study as a tool for
international regulators,” said Gordon. “We continue to urge the IAIS to
prioritize systemic importance designations by creating transparent metrics for
the riskiest activities, rather than analyzing non-systemically important
activities such as traditional property casualty insurance. We also urge the FSB’s
consideration of bank and insurance G-SIFI issues be de-linked to prevent
regulators from incorrectly lumping all financial sectors into one regulatory
framework.”
A copy of the study’s abstract is attached.
PCI is composed of
more than 1,000 member companies, representing the broadest cross-section of
insurers of any national trade association. PCI members write over $175 billion
in annual premium, 37.4 percent of the nation’s property casualty insurance.
Member companies write 43.5 percent of the U.S. automobile insurance
market, 30.6 percent of the homeowners market, 35.3 percent of the commercial
property and liability market, and 41.8 percent of the private workers
compensation market.
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