Run on the Insurance Company

  • They <Regulators> are looking, in particular, at the Mutual Benefit and saying, “Yes, Mutual Benefit had a run on the bank.”
  • They also had illiquid assets and were not able to respond to that run.
  • There is some type of measure or factor applied in looking at the liquidity of assets, the business you’re writing, the probability of a run on the bank, or all these other factors that build, either independently or as part of the risk based capital formula, into a liquidity factor.

--  Barbara L. Snyder - General American Life

1996 - Investment under the Risk-Based Capital (RBC) and Rating Agencies Requirements, Society of Actuaries - 16p

Even if we concede these differences, insurance policy holders can “run,” just differently.

  • A life insurance policy is not indentured servitude.
  • Policyholders can cash out whole life and annuity products, and halt  premium payments on term products.
  • Indeed, one of the biggest life insurance failures – $15 billion Executive Life – suffered debilitating policy surrenders contributing to its failure in 1991.

I question the argument that insurance organizations should have weaker bank/thrift holding company protections because their insurance policy holders can’t easily cash out if they make bad investments.

2014 0310 - Letter - Sheila C. Bair to Sherrod Brown

  • Senate Committee on Banking, Housing and Urban Affairs Subcommittee on Financial Institutions and Consumer Protection
  • Re: Subcommittee Hearing: “Finding the Right Capital Regulation for Insurers”
  • One problem with this approach is that the public is fickle
  • There are rumors, concerns, higher interest rates, and rising stock markets.
  • They don't draw our money away gradually, they draw it away in big hunks.
    • That's what brought Continental Bank down.
    • That's what drove Executive Life down.
  • Once large numbers of policyholders perceive a problem, they begin yanking their money.
  • The life insurance company has typically invested this in long-term investments.
    • Depending on interest rates when the rumor occurs, or when capital flight occurs, this can cause the assets to be insufficient.
  • I believe that the life insurance industry faces major potential failures because of its change in emphasis on what it is selling.
  • Are the state funds adequate to deal with this? I believe the answer to that is no. 

  • When I was taking actuarial exams, the product that was being sold was the guarantee about human mortality.
  • That was what we sold then, and now we're selling investments.
    • We're selling universal life, and we're selling GICs.
    • These have very little to do with what we originally started from, and what the industry built on.

1992 - IS THERE LIFE AFTER EXECUTIVELIFE? RETIREMENT PLAN PARTICIPANTS AND THE GUARANTEES OF INSURANCE COMPANIES , Society of Actuaries - 22p

We are seeing a real crisis in confidence:

  • That, in my mind, is probably the worst thing that could happen.   
  • There is not a company in the country that can stand runs that Commissioner Weaver was talking about, where people ask for $1 billion in policy loans and surrenders in a 2-week period.  (p13)

---  William McCartney, William, Director of Insurance, State of Nebraska and Vice President, National Association of Insurance Commissioners <NAIC>

1991 - GOV - REGULATION OF INSURANCE COMPANIES AND THE ROLE OF THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS - 286p

  • For life insurers, the risk of a bank-like “run” resulting from loss of consumer confidence is virtually non-existent.

2016 0831 - Life Insurers Do Not Pose a Systemic Risk to the Nation’s Economy, BY DIRK KEMPTHORNE (president and chief executive officer of the ACLI

Exhibit 57: Equitable Life lapse rates 2000-2004

  • Lapse rates multiplied across all product lines between 2000 and 2004.
  • However, with maximum lapse rates between 10 per cent and 15 per cent it would be inappropriate to talk about an "insurance run”.

2010 - Geneva - Systemic Risk in Insurance—An analysis of insurance and financial stability - 129p

  • The only delay that occurred, there was a 10-day delay between the seizure of the parent company in California <Executive Life> and the New York company <ELNY>
  • There was a run on the bank, quite extensive run of the bank in that 10-day period in New York, but the company was able to withstand that. (p48)

--  JAMES P. CORCORAN, FORMER INSURANCE COMMISSIONER (NEW YORK)

2002 - GOV - THE COLLAPSE OF EXECUTIVE LIFE INSURANCE CO. AND ITS IMPACT ON POLICYHOLDERS

Runs on Life Insurers 

  • Life insurers, whose liabilities are generally more liquid than their assets, are particularly vulnerable to runs by policyholders.
  • Life insurers, whose main products include insurance and investments, tried hard to maintain their share of the market by offering high rates of return on their products.
    • To pay these high returns, they needed to buy assets promising high returns. 

1994 04 - The Economic Impact of a Solvency Crisis in the Insurance Industry - CONGRESSIONAL BUDGET OFFICE 

 

Replacement

  • Congress helped out the industry by removing the threat to annuity writers of a possible run on the bank.
  • That run on the bank quite possibly could have fanned out and become an indiscriminate run on the industry at large.
  • TEFRA essentially blessed what had happened in the past, placed a safety net on the annuity business from the company's viewpoint, and essentially removed what was a very urgent and menacing threat.

-- WILLIAM R. BRITTON, JR.

1983 - INDIVIDUAL LIFE INSURANCE, Society of Actuaries

  • At the same time, the policyholder may have a run, which will have impacts on the market, the government supervision behavior, the company’s reputation decline, and so forth.
  • The payments at expiration and the surrender value of life insurance industry reached 937.9 billion yuan in 2015 and rose to 1.2 trillion yuan in 2016.
  • In the surrender value, high-cash-value products accounted for 55%. China’s insurance industry is expected to face more than 1.5 trillion yuan of maturity payment and surrender value by 2018 (Huibaoxian, 2017).
  • Although a run on the insurance industry is rare, it cannot be ignored.
  • Policyholders’ run once occurred in smaller insurers and in a normal economic environment, although what consequences it would cause in an extreme economic environment remains unknown.
  • Under the pressure of low interest rates in China, along with the regulation of government, China’s insurance companies will face a dilemma of both maturity payment and surrender value.
  • It is necessary to prevent a run event; otherwise, insurance companies’ liquidity will be significantly affected, which will lead to fracturing of company funds in a severe case or even a financial crisis.

2020 02 - Systemic Risk in China’s Insurance Industry, Society of Actuaries - 55p

Armand M. de Palo ( chief actuary at Guardian Life):

Similar situations existed with Mutual Benefit.

  • What I was speaking of is large corporate-owned life insurance where the decision maker is not buying the insurance purely for the insurance need, but actively looking at the whole block for the ability to move a block in unison.
  • If you don’t have assets that are at risk of being moved because the consumer is going to stay around, and is not going to react rapidly, you can have a different profile.
  • But when you have a bank-owned reinsurance block, or you have a corporate owned life insurance (COLI) block of business, someone can say, “Your ratings went down from AA to A, or AAA to AA.
  • I am going to move the entire block of business.” I’ve actually seen this in some of the proposed agreements between companies that want to go into these lines of business and some of the large brokerage companies.
  • The brokers wanted a guarantee that the company would facilitate the movement of the block if the rating of the company ever went down.
  • New York state had to react to this, and there’s an outright forbidding action to allow such a guarantee.
  • The reason for that is very simple: if you have a class of policyholders that are sophisticated investors, and this
    maybe is a mutual company issue, and you have people who are individual policyholders, the sophisticated investor can pull out the good assets, at the expense of the individual policyholders.
  • That’s a problem for a mutual company.
  • It is probably a problem with any company.
  • I think this run on the bank can be better served by having circuit breakers, so a large client cannot move the block. If they can move the block, there should be a market-value adjustment.
  • The regulators have to make a distinction between individual policyholders.
  • We want to give them access to their money.
  • There is a need to say to someone: ”If your cash flow is negative for the month, you have to go to the regulators, and if it’s due to large clientele, maybe it’s time to freeze the outflow of money before the large clients get the money, leaving everyone else to pay the bill.”
  • I think that’s the real issue.

Mr. Cowell: I think you’ve touched on an area, Armand, that surprised me that it didn’t come up explicitly throughout this whole discussion.

1996 - Investment under the Risk-Based Capital (RBC) and Rating Agencies Requirements, Society of Actuaries - 16p