Regulating P&C companies for systematic risk
By Andrew Barile
Andrew Barile Consulting Corporation
Very few property/casualty insurers use commercial paper, short term debt, or other leverage instruments in their capital structures, a fact that makes them less vulnerable than highly leveraged institutions when financial markets collapse.
Because of their basis, business model and strict capital requirements imposed by state insurance department regulators, property/casualty insurers are much more heavily capitalized, in terms of their asset to liabilities ratios than banks and hedge funds.
Mutual funds and privately owned insurance companies have always had difficulty raising capital to meet the growing needs of their insurance company. Property/casualty insurance companies neither borrow to make investments, nor borrow to pay claims. The property/casualty insurance industry is not suffering from a credit or liquidity crisis.
Property/casualty insurance companies that have built-up reserves and have their investments are designed to match the statistically anticipated claims payments, thus cause no liquidity risk. I set on the boards as an Independent Director of insurers in New York and California, which adhere to this scenario.
Property/casualty insurers manage concentrations of investments and have regulatory limitations on both the type and concentrations of the assets in which they invest.
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