Insurance Contracts and Derivatives that Substitute for Them: How and Where Should Their Systemic and Nonperformance Risks be Regulated?

Edward Kane

No 2014-PB-03, NFI Policy Briefs from Indiana State University, Scott College of Business, Networks Financial Institute

Abstract: Traditionally, individual states have shared responsibility for regulating the US insurance industry. The Dodd-Frank Act changes this by tasking the Federal Reserve with regulating the systemic risks that particularly large insurance organizations might pose and assigning the regulation of swap-based substitutes for insurance and reinsurance products to the SEC and CFTC. This paper argues that prudential regulation of large insurance firms and weaknesses in federal swaps regulation could reduce the effectiveness of state-based systems for protecting policyholders and taxpayers from nonperformance in the insurance industry. Swap-based substitutes for traditional insurance and reinsurance contracts offer protection sellers a way to transfer responsibility for guarding against nonperformance into potentially less-effective hands. The CFTC and SEC lack the focus, expertise, experience, and resources to manage adequately the ways that swaps transactions can affect US taxpayers’ equity position in global safety nets, while regulators at the Fed refuse to recognize that conscientiously monitoring accounting capital at financial holding companies will not adequately protect taxpayers and policyholders until and unless it is accompanied by severe penalties for managers that willfully hide their firm's exposure to destructive tail risks.

Keywords: Dodd-Frank Act; systemic risk; nonperformance risk; regulatory culture; financial reform (search for similar items in EconPapers)
JEL-codes: E61 G21 G22 G28 K42 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2014-04
New Economics Papers: this item is included in nep-ban, nep-ias, nep-law and nep-rmg
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