So the current regulatory regime for insurance corporations is already helping to mitigate systemic risk. However, it was designed from a microprudential angle. We should also take a system-wide perspective. Insurers could act as systemic amplifiers due to their high degree of interconnectedness with the financial system. If insurers respond to shocks in a similar way, this can lead to contagion effects.
For instance, Insurers may decide to stop holding certain asset classes. The sale of assets into a falling market could amplify the initial fall in asset prices. By doing so, the insurance sector could reinforce or pass on shocks to the rest of the financial system as well as to the real economy.