Abstract

http://ssrn.com/abstract=2404492
 


 



Regulating Systemic Risk in Insurance


Daniel Schwarcz


University of Minnesota Law School

Steven L. Schwarcz


Duke University - School of Law

March 24, 2014

University of Chicago Law Review, Vol. 81, No. 4, 2014
Minnesota Legal Studies Research Paper No. 14-18

Abstract:     
As exemplified by the dramatic failure of American International Group (AIG), insurance companies and their affiliates played a central role in the 2008 Global Financial Crisis. It is therefore not surprising that the Dodd-Frank Act – the United States’ primary legislative response to the crisis – contained an entire title dedicated to insurance regulation, which has traditionally been the responsibility of individual states. The most important of these insurance-focused reforms in Dodd-Frank empowered the Federal Reserve Bank to impose an additional layer of regulatory scrutiny on top of state insurance regulation for a small number of “systemically important” insurers, such as AIG. But in focusing on the risk that an individual insurer could become too big to fail, this Article argues that Dodd-Frank largely overlooked a second, and equally important, potential source of systemic risk in insurance: the prospect that correlations among individual insurance companies could contribute to or cause widespread financial instability. In fact, the Article argues that there are often substantial correlations among individual insurance companies with respect to both their interconnections with the larger financial system and their vulnerabilities to failure. As a result, the insurance industry as a whole can pose systemic risks that regulation should attempt to identify and manage. Traditional state-based insurance regulation, the Article contends, is poorly adapted at accomplishing this given the mismatch between state boundaries and systemic risks and states’ limited oversight of non-insurance financial markets. As such, the Article suggests enhancing the power of the Federal Insurance Office – a federal entity currently primarily charged with monitoring the insurance industry – to supplement or preempt state law when states have failed to satisfactorily address gaps or deficiencies in insurance regulation that could contribute to systemic risk.

Number of Pages in PDF File: 63

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Date posted: March 6, 2014 ; Last revised: March 28, 2014

Suggested Citation

Schwarcz, Daniel and Schwarcz, Steven L., Regulating Systemic Risk in Insurance (March 24, 2014). University of Chicago Law Review, Vol. 81, No. 4, 2014; Minnesota Legal Studies Research Paper No. 14-18. Available at SSRN: http://ssrn.com/abstract=2404492 or http://dx.doi.org/10.2139/ssrn.2404492

Contact Information

Daniel B. Schwarcz
University of Minnesota Law School ( email )
229 19th Avenue South
Minneapolis, MN 55455
United States
Steven L. Schwarcz (Contact Author)
Duke University - School of Law ( email )
Box 90360
Duke School of Law
Durham, NC 27708
United States
919-613-7060 (Phone)
919-613-7231 (Fax)
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