Insurance Companies and Systemic Risk

Originally posted on The Baseline Scenario:

By James Kwak

The systemic risk posed by insurance companies is something that I’ve never been entirely clear about. I know it’s an enormous issue for large insurers who want to avoid additional oversight by the Federal Reserve. I’m well aware of the usual defense, which is that insurers are not subject to bank runs because their obligations are, in large measure, pre-funded by policyholder premiums, and policyholders must pay a price in order to stop paying premiums. But this has never seemed entirely convincing to me, because some insurers are enormous players in the financial markets, and the nature of systemic risk seems to be that it can arise in unusual places.

So I find very helpful Dan and Steven Schwarcz’s new paper discussing the ins and outs of systemic risk and insurance. Because it’s written for a law review audience, it covers all the basics, so you can…

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