I. Summary

Acharya et al define SRISK as a macro-finance measure of systemic risk to furnish “an estimate of the amount of capital that a financial institution would need to raise in order to function normally if we have another financial crisis.” SRISK measures the “expected capital shortfall” of an institution during a financial crisis, defined as the “projected market capitalization” if equity markets declined by 40% based on historical stock market correlations (i.e. equity beta) minus the “prudent market capitalization,” defined as greater than or equal to 8% of total assets, a leverage ratio. Acharya and Richardson use SRISK to argue that select insurers are as vulnerable to large capital shortfalls as are banks in stressed macroeconomic environments. In this paper, we argue the inappropriateness of SRISK as a measure of systemic risk for insurers.


The principal arguments of this paper are that:
  • SRISK measures only vulnerability, not the potential for an institution to cause or transmit systemic risk. Systemic risk can occur when actions by an institution threaten the health of other financial institutions or the stability of the financial system; as designed, the SRISK measure only shows whether an institution may be vulnerable to failure in a period of macro-economic stress, not whether its loss in market capitalization or distress would transmit systemic risk. Further, the high-level assumptions in the SRISK measure ignore differences between the business models of different types of financial institutions, such as the types of assets and liabilities held, and therefore the metric cannot provide this type of assessment. The SRISK measure entirely ignore the fact that contagion rather than connectedness is the major threat to the financial system, and capital requirements, at any reasonable level, will be insufficient to forestall or resist, contagious runs.
  • SRISK does not accurately measure an institution’s capital shortfall during stress. The measure assumes that an insurer would manage its business to sustain an 8% ratio of market capitalization to total assets, implying that a decline in market capitalization would require the institution to raise capital or sell assets. This argument assumes a significant drop in market price is a correct measure of real capital. It also fails to reflect significant differences between market capitalization and insurance regulatory capital across all major insurance operating regulatory regimes. This relationship is evidenced by experience in the 2008-9 financial crisis, when many insurers’ market capitalizations dropped precipitously without a meaningful decline in regulatory capital or the volumes of new business written.