Why (Re)insurance is Not Systemic

• Published date: 01 September 2014
• Date: 01 September 2014
• DOI: http://doi.org/10.1111/j.1539-6975.2013.12007.x
• Author: Denis Kessler

WHY (RE)INSURANCE ISNOT SYSTEMIC

Denis Kessler

ABSTRACT

The traditional model of (re)insurance lacks the elements that make a

financial institution systemically important: risks are effectively pulverized;

liabilities tend to be prefunded, which eliminates most of the leverage in the

traditional sense; and active asset-liability management reduces most of the

liquidity mismatch that traditionally propagates systemic risk. (Re)insurers

that have stuck to this traditional business model have successfully

weathered the crisis, even playing a stabilizing role. Unfortunately, this is

not sufficiently recognized in the current IAIS/FSB

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debate on assessing

systemic risk in the (re)insurance sector.

BYTHEIR VERY NATURE,(RE)INSURER FAILURES POSE VERY LIMITED SYSTEMIC RISK

The failure of a (re)insurer is a relatively rare event, and when it does actually occur, it

poses very limited systemic risk. Many fears focus in particular on the supposed

systemic nature of a reinsurer’s failure. However, between 1980 and January 2011,

only 29 individual reinsurers failed (IAIS, 2012b), while in the third quarter of 2009

alone, 50 American banks went bankrupt according to the Federal Deposit Insurance

Corporation (FDIC) figures. Although relatively more frequent, primary insurer

failures are not systematically important events and have never generated a financial

crisis, whereas bankruptcies and bank runs are more commonplace in the landscape

of financial crises. As put by Diamond and Dybvig (2000), “Bank runs are a common

feature of the extreme crises that have played a prominent role in monetary history.”

For example, in the United States alone, about 10 banking panics occurred during the

1873–1933 period (Wicker, 1996). Although not all of them spurred a widespread

economic crisis, some of them were truly systemic, with knock-on effects on the asset

and product markets. Since the establishment of the FDIC, no insured bank has failed

because of massive deposit withdrawals, but aborted runs still happen periodically in

Denis Kessler is Chairman and Chief Executive Officer of SCOR. The author can be contacted

via e-mail: dkessler@scor.com. This text is based on Denis Kessler’s keynote speech at Temple

University in Philadelphia (Pennsylvania) during the conference entitled Convergence,

Interconnectedness, and Crises: Insurance and Banking, held on December 9, 2011. For helpful

comments, Denis Kessler thanks an anonymous referee, J. David Cummins, and Georges

Dionne. He also thanks Michal Zajac for research assistance. All mistakes are solely those of the

author.

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IAIS: International Association of Insurance Supervisors, FSB: Financial Stability Board.

© The Journal of Risk and Insurance, 2013, Vol. 81, No. 3, 477–487

DOI: 10.1111/j.1539-6975.2013.12007.x

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