The Underwriting Cycles Model for Insurers’ Financial Stability vs. Systemic Risk Using the Case of the 2001 Hih Insurance Failure in Australia

In this study we develop a financial stability model of the insurance mechanism titled “The 4-Prong Model of the Integrated Insurance Mechanism for Financial stability.” The HIH insurance failure in 2001 in Australia provides a platform to examining the question “Is there connection between an insurer's financial troubles and systemic risk within the underwriting cycle mechanism?” We show that it is impossible to regard the HIH failure a systemic risk event as it did not harm the economy or other financial institutions. All the external and internal elements that surrounded the HIH failure show an insurer that operated out of the boundaries of the 4-Prong model while the rest of the Australian general insurers adhered to the 4-Prong model and demonstrated resilience (opposite to systemic risk.) The 4 prongs of the model when followed permitted the healthy insurers to function better and provide the needed coverage for the right underwriting and pricing. The model helps explain why a mistaken analogy between the insurance underwriting cycle and systemic risk can be harmful to society and the economy in general. This mistake can lead to reducing insurers' capacity needlessly. Insurers contracts markets with higher pricing to keep solvent. This mechanism is a symbol of strength and not a systemic risk which is a domino effect of failures of financial institutions with lack of substitutions. While HIH is the case study here, this analogy can be applied to other P/C failures – they do not disrupt the financial sectors or economies – they are just single failures