Increasingly, Washington leaders are talking about systemic risk as the issue to stabilize the markets and prevent a repeat of the problems that caused our economic downturn. From President Barack Obama to House Financial Services Committee Chairman Barney Frank (D-Mass.) to various other top leaders in our nation's capital, systemic risk is increasingly listed as the top priority within the broader context of financial services reform. The Property Casualty Insurers Assn. of America (PCI) fully agrees. In fact, we have been saying for months that systemic risk in the financial services sector is the top issue that the federal government must address. Our leaders must not be sidetracked by other issues, such as federal versus state regulation of insurance, which have been ongoing for decades and have no immediate resolution. The lengthy debate over whether to regulate insurance at the federal or state level is not the right question to discuss at this time. The results of that debate will do nothing to ease the overall economic crisis, which largely occurred because of a series of interconnected market failures.

So, what exactly is systemic risk? In plain language, if the federal government has to step in to bail out a company to protect the larger economy, that's a systemic risk.

To expand on this definition, we think it is incorrect to say that a company poses systemic risk because it is “too big to fail.” The correct measure, we believe, is not whether a company is too large, but “too interconnected to fail.” A large insurer may pose no systemic risk, while a small, interconnected financial company may have a profound impact on the overall market because its failure would create a systemic ripple effect. That leads me to my next point, which is that traditional property-casualty insurance companies are not generally so interconnected that they pose a systemic risk. They do not create any counter-party risk and their exposures are not correlated with other systemic waves or economic cycles. For instance, a downturn in the economy does not necessarily lead to more auto insurance claims. Additionally, there are many competing auto insurance suppliers, so the failure of even a very large international auto insurer would have minimal sequential systemic risk impact. Even in this economic downturn, the vast majority of property-casualty companies are well capitalized and solvent, continuing to provide ample coverage in open markets. To address the economic crisis, restore investor confidence and prevent another economic disaster from recurring, PCI advocates the creation of a systemic risk overseer within the Federal Reserve Board (FRB). However, the FRB's systemic risk oversight should be completely separate from other bank holding company oversight powers. Jurisdiction would include any institution engaged in financial activities that in aggregate present a significant systemic risk. Also included would be any financial institution that submits to federal systemic risk oversight, such as for international equivalency treatment. In creating a systemic risk overseer, it is crucial that legislators do not confuse solvency with systemic risk. Solvency regulation is conducted by functional regulators to ensure that companies have sufficient capital to meet their obligations. Systemic risk oversight would prevent holding company failures from contaminating other markets and the larger economy. Merging solvency regulation into systemic risk oversight would only create a “too big to fail” regulator, and as we have noted, this is not the best measurement. These proposals are practical solutions, and solving the systemic risk crisis does not require a vast new regulatory bureaucracy. PCI stands ready to work with our nation's leaders to develop a viable resolution that will stabilize our economic markets and keep another such crisis from happening.