Insurance and Interconnectedness in the Financial Services Industry

valuation of assets during the financial crisis than non-­‐life insurers and the decrease in value was similar
to that experienced by banks.
Property-­‐casualty insurers
In general, property and casualty insurance is protection against the loss or damage to property from
perils, liability from injuries or damage to property, business interruption losses, and losses due to
accident or illness. The companies in the property-­‐casualty industry provide a diverse set of insurance
products.
The property side of the business consists primarily of first-­‐party property coverage such as
insurance for fire, ocean and inland marine, auto physical damage, farm and homeowners, commercial,
crop, and flood insurance. It is very similar to accident-­‐health in that the policies are renewed annually,
the policy must be in effect at the time of the loss, and there is a relatively short payout time between
receipt of premium and payment of claims. Generally, damage to property is reported quickly and is
relatively easy to adjust.
Liability insurance provides coverage to the insured for their negligence causing injury and/or
damage to third parties. Liability claims can take much longer to resolve particularly if liability is
questionable and damages are large or complex. There may be a long period of time between payment
of premium and payment of claim. For example, medical malpractice claims take, on average, between
4 to 6 years to resolve.
There are at least three potential paths for interconnectedness to other financial service firms.
First, as with other insurers, the insurer may be affected by the revaluation of the investment portfolio
as market values fell, especially those of mortgage-­‐backed securities. Second, the potential claims for
errors and omissions (E&O) insurance, as well as directors’ and officers’ insurance, increased with the
exposure of possible claims related to disclosures and valuation of assets. Third, the recessionary
environment that followed the crisis may be accompanied by more claims of losses, as well as a drop in
insurance premiums due to devaluations of insured homes. Unlike life insurers, however, property and
casualty insurers did not shift any of it risks through securitization.
Many have argued that property and casualty insurers are not systemically important. Though
there is some degree of interconnectedness, this type of insurance company is more reactive to the
general economy, rather than proactive.
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