NAIC TESTIFIES ON SYSTEMIC RISK
Capacity, Consumer Protections Isolate
Risk in Insurance
WASHINGTON, D.C. (June 16, 2009) - Testifying
today on behalf of the National Association of Insurance
Commissioners (NAIC), Illinois Insurance Director Michael McRaith
addressed the role of systemic risk in insurance. His testimony
focused on the inherently compatible role of state regulation in any
sound approach to systemic risk regulation.
"Insurance companies are more often the conduits or receivers of
risk rather than the creators since the assumption of risk, after
all, is fundamental to the insurance business," McRaith told members
of the U.S. House Committee on Financial Services Subcommittee on
Capital Markets, Insurance, and Government Sponsored Enterprises.
"With respect to systemic risk, insurers also do not originate risk,
but most often receive risk - a fact that provides ample motivation
to close regulatory gaps and encourage greater financial
McRaith highlighted the fact that insurers' exposure to systemic
risk typically flows from linkages to the capital markets. Citing
AIG as an example, McRaith noted that AIG's unregulated credit
default swap (CDS) transactions impaired the holding company,
resulting in a downgrade that threatened policyholders' confidence
in the otherwise stable insurance subsidiaries. He also pointed out
that AIG's insurance companies were directly exposed to systemic
risk through securities lending partnerships with other financial
Noting that the insurance industry has fared better than its
banking and securities counterparts in the current economic crisis,
McRaith testified, "Insurers' high capitalization requirements and
low leverage have kept them from incurring the steep losses faced by
other financial institutions." He cited the state guaranty fund
system as an essential backstop to protect insurance policyholders
in the event an insurance company were to fail.
"The state-based insurance regulatory system is one of critical
checks and balances, without the perils of a single point of failure
and omnipotent decision making," McRaith emphasized. "States have a
long history of consumer protection and market stability - the two
pillars on which any system of financial stability regulation can,
and must, be built."
for full text of McRaith's testimony.
About the NAIC
Formed in 1871, the National Association of Insurance Commissioners
(NAIC) is a voluntary organization of the chief insurance regulatory
officials of the 50 states, the District of Columbia and five U.S.
territories. The NAIC has three offices: Executive Office, Washington,
D.C.; Central Office, Kansas City, Mo.; and Securities Valuation Office,
New York City. The NAIC serves the needs of consumers and the industry,
with an overriding objective of supporting state insurance regulators as
they protect consumers and maintain the financial stability of the
insurance marketplace. For more information, visit www.naic.org.
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