Unnecessary injury: the economic rationale and costs of new global capital requirements for large U.S. property and casualty insurers

Robert J. Shapiro and Aparna Mathur
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Robert J. Shapiro: Sonecon, LLC
Aparna Mathur: American Enterprise Institute

Journal of Financial Perspectives, 2017, vol. 4, issue 1, 50-64

Abstract: In the wake of 2008-2009 global financial crisis (GFC), governments in most developed countries adopted new forms of financial regulation; more recently their attention has shifted to international regulation. One trans-national effort involves applying new global capital requirements to “Global Systemically Important Insurers” (G-SIIs), whose failure could trigger a new financial crisis. Talks are also underway regarding new global capital requirements for large insurance companies with significant foreign operations that do not present systemic risks to their own economies or the global financial system. We analyze the rationale for this new approach and the costs associated with applying it to large U.S. property and casualty (P&C) insurers. We find that additional capital requirements are unnecessary, because even the largest U.S. P&C insurers pose no systemic risk to the U.S. or global financial systems. We further find that current state based capital requirements for U.S. P&C insurers are sufficient to ensure that they can handle the claims arising from even the most extraordinary losses. We also find that imposing additional capital requirements on large U.S. P&C insurers, all other factors being equal, would slow the growth of new P&C coverage and increase the cost of that coverage.

Keywords: Insurance; capital requirements (search for similar items in EconPapers)
JEL-codes: G22 (search for similar items in EconPapers)
Date: 2017
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