Systemic Risk and the Insurance Industry

  • J. David Cummins
  • Mary A. Weiss


This chapter examines the potential for the US 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 US insurers do not pose systemic risk. However, life insurers are vulnerable to intra-sector crises; and both life and property-casualty insurers are vulnerable to reinsurance crises arising from counterparty credit risk. Noncore activities such as financial guarantees and derivatives trading may cause systemic risk, and interconnectedness among financial institutions has grown significantly in recent years. To reduce systemic risk from noncore activities, regulators need to continue efforts to strengthen mechanisms for insurance group supervision, particularly for multinational groups.


Gross Domestic Product Systemic Risk Hedge Fund Life Insurance Credit Default Swap 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.



We thank Zhijian Feng and Yanqing Zhang for their excellent and tireless assistance with the data analysis. Any mistakes are solely the responsibility of the authors.


  1. Acharya VV, Biggs J, Richardson M, Ryan S (2009) On the financial regulation of insurance companies, working paper. NYU Stern School of Business, New YorkGoogle Scholar
  2. Acharya VV, Pedersen LH, Philippon T, Richardson M (2010) Measuring systemic risk, working paper. Federal Reserve Bank of Cleveland, Cleveland, OHGoogle Scholar
  3. AM Best Company (2012a) Best’s aggregates and averages: life/health – 2012 edition. Oldwick, NJGoogle Scholar
  4. AM Best Company (2012b) Best’s aggregates and averages: property/casualty – 2012 edition. Oldwick, NJGoogle Scholar
  5. AM Best Company (2012c) US life/health – 1969–2011 impairment review. Oldwick, NJGoogle Scholar
  6. AM Best Company (2012d) US property/casualty – 1969–2011 P/C impairment review. Oldwick, NJGoogle Scholar
  7. Baluch F, Mutenga S, Parsons C (2011) Insurance, systemic risk, and the financial crisis. The Geneva Papers 36:126–163CrossRefGoogle Scholar
  8. Bank for International Settlements (BIS) (2003) A glossary of terms used in payments and settlements systems. Basel, Switzerland.
  9. Bank for International Settlements (BIS) (2007) Triennial central bank survey: foreign exchange and derivatives markets in 2007. Basel, SwitzerlandGoogle Scholar
  10. Bardo MD, Landon-Lane JS (2010) The global financial crisis of 2007–08: is it unprecedented? National Bureau of Economic Research Working Paper 16589, Cambridge, MACrossRefGoogle Scholar
  11. Bell M, Keller B (2009) Insurance and stability: the reform of insurance regulation. Zurich Financial Services Group, Zurich, SwitzerlandGoogle Scholar
  12. Bernanke BS (2005) The global saving glut and the US current account deficit. Board of Governors of the Federal Reserve System, Washington, DCGoogle Scholar
  13. Berry-Stoelzle TR, Nini GP, Wende S (2011) External financing in the life insurance industry: evidence from the financial crisis, working paper. University of Georgia, Athens, GAGoogle Scholar
  14. Billio M, Getmansky M, Lo AW, Pelizzon L (2011) Econometric measures of connectedness and systemic risk in the finance and insurance sectors, MIT Sloan Research Paper 4774–10, Cambridge, MAGoogle Scholar
  15. Brunnermeier MK (2009) Deciphering the liquidity and credit crunch: 2007–2008. J Econ Perspect 23:77–100CrossRefGoogle Scholar
  16. Brunnermeier MK, Pedersen LH (2009) Market liquidity and funding liquidity. Rev Financ Stud 22(6):2201–2238CrossRefGoogle Scholar
  17. Chen H, Cummins JD, Viswanathan KS, Weiss MA (2014) Systemic risk and the inter- connectedness between banks and insurers: an econometric analysis. J Risk Insur (forthcoming)Google Scholar
  18. Cummins JD (2007) Reinsurance for natural and man-made catastrophes in the United States: current state of the market and regulatory reforms. Risk Manag Insur Rev 10:179–220CrossRefGoogle Scholar
  19. Cummins JD (2008) The Bermuda insurance market: an economic analysis. Bermuda Insurance Market, Hamilton, Bermuda.
  20. Cummins JD, Weiss MA (2000) The global market for reinsurance: consolidation, capacity, and efficiency. Brookings-Wharton Papers on Financial Services 2000:159–222Google Scholar
  21. Cummins JD, Weiss MA (2009) Convergence of insurance and financial markets: hybrid and securitized risk-transfer solutions. J Risk Insur 76(3):493–545CrossRefGoogle Scholar
  22. De Bandt O, Hartmann P (2000) Systemic risk: a survey. European Central Bank Working Paper Series, Working Paper No. 35, November, Frankfurt, GermanyGoogle Scholar
  23. Federal Deposit Insurance Corporation (FDIC) (1997) Continental Illinois and ‘too big to fail’. In: History of the eighties – lessons for the future, vol 1. Washington, DC, pp 235–258Google Scholar
  24. Fee CE, Thomas S (2004) Sources of gains in horizontal mergers: evidence from customer, supplier, and rival firms. J Financ Econ 74:423–460CrossRefGoogle Scholar
  25. Financial Stability Board (2009) Guidance to assess the systemic importance of financial institutions, markets and instruments: initial considerations. Basel, SwitzerlandGoogle Scholar
  26. Gallanis PG (2009) NOLHGA, the life and health insurance guaranty system, and the financial crisis of 2008–2009. National Association of Life & Health Insurance Guaranty Associations, Herndon, VA. Available at
  27. Geneva Association (2010) Systemic risk in insurance: an analysis of insurance and financial stability. Geneva, SwitzerlandGoogle Scholar
  28. Geneva Association (2011) Considerations for identifying systemically important financial institutions in insurance. Geneva, SwitzerlandGoogle Scholar
  29. Geneva Association (2012) Insurance and resolution in light of the systemic risk debate. Geneva, SwitzerlandGoogle Scholar
  30. Gorton G (2008) The panic of 2007. National Bureau of Economic Research working paper 14358, Cambridge, MAGoogle Scholar
  31. Grace MF (2010) The insurance industry and systemic risk: evidence and discussion, working paper. Georgia State University, Atlanta, GAGoogle Scholar
  32. Group of Ten (2001) Report on consolidation in the financial sector. Bank for International Settlements, Basel, SwitzerlandGoogle Scholar
  33. Group of Thirty (2006) Reinsurance and international financial markets. Washington, DCGoogle Scholar
  34. Haefeli D, Ruprecht W (eds) (2012) Surrenders in the life insurance industry and their impact on liquidity. The Geneva Association, Geneva, SwitzerlandGoogle Scholar
  35. Harrington SE (1992) Policyholder runs, life insurance company failures, and insurance solvency regulation. Regulation 15:27–37Google Scholar
  36. Harrington SE (2009) The financial crisis, systemic risk, and the future of insurance regulation. J Risk Insur 76(4):785–819CrossRefGoogle Scholar
  37. Helwege J (2010) Financial firm bankruptcy and systemic risk. Int Financ Markets Institutions Money 20:1–12CrossRefGoogle Scholar
  38. Hertzel MG, Zhi L, Micah SO, Kimberly JR (2008) Inter-firm linkages and the wealth effects of financial distress along the supply chain. J Financ Econ 87:374–387CrossRefGoogle Scholar
  39. Huang X, Zhou H, Zhu H (2009) A framework for assessing the systemic risk of major financial institutions. J Bank Finance 33:2036–2049CrossRefGoogle Scholar
  40. Insurance Information Institute (2012) Financial services fact book. New York, NYGoogle Scholar
  41. International Association of Insurance Supervisors (IAIS) (2009) Systemic risk and the insurance sector. Basel, SwitzerlandGoogle Scholar
  42. International Association of Insurance Supervisors (IAIS) (2012) Global systemically important insurers: proposed assessment methodology. Basel, SwitzerlandGoogle Scholar
  43. International Monetary Fund (IMF) (2009) Global financial stability report, responding to the financial crisis and measuring systemic risks. Washington, DCGoogle Scholar
  44. Kaufman GG, Scott KE (2003) What is systemic risk, and do bank regulators retard or contribute to it? Indepen Rev 7(3):371–391Google Scholar
  45. Life Insurance Fact Book (2011) American Council of Life Insurers (Washington, DC)Google Scholar
  46. MacMinn R, Garven J (2000) On corporate insurance. In: Georges D (ed) Handbook of insurance. Kluwer, BostonGoogle Scholar
  47. Mills RH (1964) Cash flow and solvency of life insurance companies. J Risk Insur 31:621–629CrossRefGoogle Scholar
  48. Mortgage Bankers Association (2010) National delinquency survey. Washington, DCGoogle Scholar
  49. National Association of Insurance Commissioners (NAIC) (2011a) Capital markets special report. NAIC Capital Markets Group, New York, NYGoogle Scholar
  50. National Association of Insurance Commissioners (NAIC) (2011b) Capital markets special report, May 20. NAIC Capital Markets Group, New York, NYGoogle Scholar
  51. National Conference of Insurance Guaranty Funds (NCIGF) (2011) Testimony for the record on the national conference of insurance guaranty funds before the house financial services subcommittee on insurance, housing, and community opportunity, Washington, DC, 16 November 2011.
  52. Neyer JS (1990) The LMX spiral effect. Best’s Rev 91:62ffGoogle Scholar
  53. O’Neill W, Sharma N, Carolan M (2009) Coping with the CDS crisis: lessons learned from the LMX spiral. J Reinsurance 16:1–34Google Scholar
  54. Oxera (2007) Insurance Guarantee Schemes in the EU. Final Report Prepared for European Commission DG Internal Market and Services, Brussels, BelgiumGoogle Scholar
  55. Park SC, Xie X (2011) Reinsurance and systemic risk: the impact of reinsurer downgrading on property-casualty insurers, working paper. California State University, FullertonGoogle Scholar
  56. Pozsar R, Adrian T, Ashcraft A, Boesky H (2010) Shadow banking, Federal Reserve Bank of New York Staff Report No. 458, New York, NYGoogle Scholar
  57. Saunders A, Cornett MM (2008) Financial institutions management: a risk management approach, 6th edn. McGraw-Hill, New YorkGoogle Scholar
  58. Schwartz SL (2008) Systemic risk. Georgetown Law J 97:194–249Google Scholar
  59. Standard & Poor’s (2012a) Industry surveys: banking. New York, NYGoogle Scholar
  60. Standard & Poor’s (2012b) Industry surveys: insurance – life & health. New York, NYGoogle Scholar
  61. Swiss Re (2003) Reinsurance – a systemic risk? Sigma No. 5/2003. Zurich, SwitzerlandGoogle Scholar
  62. Swiss Re (2012a) Natural catastrophes and man-made disasters in 2011: historic losses surface from record earthquakes and floods, Sigma No. 2/2012. Zurich, SwitzerlandGoogle Scholar
  63. Swiss Re (2012b) World insurance in 2010: nonlife ready for takeoff, Sigma No. 3/2012. Zurich, SwitzerlandGoogle Scholar
  64. United States, Department of Commerce, Bureau of Economic Analysis (BEA) (2012) National economic accounts. Washington, DC.
  65. United States, Department of the Treasury (2012) Written testimony of treasury secretary Geithner before the Senate committee on banking, housing, and urban affairs on the financial stability oversight council annual report to Congress, Washington, DCGoogle Scholar
  66. United States, Department of the Treasury, Financial Stability Oversight Council (FSOC) (2012) 2012 Annual Report. Washington, DCGoogle Scholar
  67. Wallison PJ, Calomiris CW (2008) The last trillion dollar commitment: the destruction of Fannie Mae and Freddie Mac. American Enterprise Institute Financial Outlook Series. Washington, DCGoogle Scholar
  68. World Economic Forum (2008) Global risks 2008. Geneva, SwitzerlandCrossRefGoogle Scholar
  69. Zhou R (2000) Understanding intraday credit in large-value payment systems. Fed Reserv Bank of Chicago Econ Perspect 24(3):29–44Google Scholar

Copyright information

© Springer Science + Business media, New York 2013

Authors and Affiliations

  1. 1.Department of Risk, Insurance, and Healthcare ManagementTemple UniversityPhiladelphiaUSA

Personalised recommendations