Unnecessary Injury: The Economic Costs of Imposing New Global Capital Requirements on Large U.S. Property and Casualty Insurers

Abstract

In the wake of the global financial crisis of 2008-2009, governments in every developed country applied new forms of financial regulation, and now their attention has shifted to international regulation. One of those trans-national efforts involves applying a new layer of global capital requirements to “Global Systemically Important Insurers (G-SIIs), whose failure could trigger a new financial crisis. In addition, talks are underway to also impose new global capital requirements on large insurance companies with significant foreign operations, but which do not present a systemic risk to their own economies or the global financial system (Internationally Active Insurance Groups or IAIGs). This study examines the rationale for this new regulatory approach and the costs associated with applying it to large U.S. property and casualty (P&C) insurers representing about 26 percent of the US P&C market. We find, first, that such additional capital requirements are unnecessary: Even the largest U.S. P&C insurers pose no systemic risk to the U.S. or global financial systems, and current state-based capital requirements are sufficient to ensure that they can handle the claims arising from even the most extraordinary losses, including from events likely to occur once every 100 years, 250 years and 500 years. Second, we find that imposing additional capital requirements on large U.S. P&C insurers with substantial foreign business, all other factors being equal, would likely force them to slow the growth of new P&C coverage, increase the cost of that coverage, and reduce their investments. We estimate that the annual premiums charged by U.S. IAIGs for homeowner’s coverage would increase by $45-to-$109; and the average annual cost of auto insurance from an affected company could rise by $34-to-$68. We further estimate that the new global regulation of IAIGs could slow the growth of new premiums by an average of between $2.9 billion and $7.3 billion per-year. Finally, we estimate that the new capital requirements for IAIGs would reduce the growth of investments by those insurers by between $726 million and $1.8 billion over the next five years (2014-2018).

Keywords: Insurance, regulation, IAIGs, capital requirements, financial crisis, property and casualty

JEL Classification: G15, G18, G22, G38, K23