Actuarial Notes

Reviewing Systemic Risk within the Insurance Industry

By Max J. Rudolph · Society of Actuaries · 2017

Study guide: Exam CFE-101

A research review, dated February 2017, that sets out definitions of systemic risk and applies them to the insurance industry. Written by Max J. Rudolph for the Society of Actuaries, it covers the drivers of systemic risk, historical insurer insolvencies, what could get an insurer into trouble, whether current resolution methods would work in a crisis, and how insurers differ from banks. It concludes that insurers are receivers of systemic risk rather than primary drivers of it.

On the syllabus

  • Exam CFE-101 — Reviewing Systemic Risk within the Insurance Industry, SOA, Feb 2017 (excluding pp. 27-29); outcome 2.2h.

Executive Summary

Systemic Risk

  • Systemic Risk Definition
  • Definition Nuances
  • What are the Drivers of Systemic Risk?
    • Size
    • Interconnectedness, complexity and opacity
    • Lack of Substitutability
    • Timing
    • Leverage
    • Cross-jurisdictional activity
    • Buffers
    • Government policies and regulations
    • Common Drivers of Company Problems
  • Historical insurer insolvencies
    • AIG – credit default swaps
    • Baldwin-United
    • Executive Life
    • Mutual Benefit Life
    • Confederation Life
    • Long Term Capital Management
  • What could get an insurer into trouble
    • Funding Structures
    • Securities lending programs
    • Incentives - Originate and distribute model
    • Macroeconomic conditions
    • Variable Annuities with internal assets under management
  • Would current insurance resolution methods work in a crisis?
    • Reinsurance
    • Investments
    • Misconduct
    • Regulatory Driven Risks
    • Concentration
  • How do insurers differ from banks?
  • Observations from other papers
    • Weiss/Cummins
    • Billio
    • Office of Financial Research (OFR) 2016 Annual Report to Congress

Summary

Sources