Run on the Insurance Company

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.

http://www.systemicriskcouncil.org/wp-content/uploads/2014/03/Sheila-Bair-Letter-to-Senate-Banking-re-Section-171.pdf

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

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

A bank run is the sudden withdrawal of deposits of just one bank. A banking panic or bank panic is a financial crisis that occurs when many banks suffer runs at the same time, as a cascading failure. In a systemic banking crisis, all or almost all of the banking capital in a country is wiped out; this can result when regulators ignore systemic risks and spillover effects.[2]

Laeven, L.; Valencia, F. (2008). "Systemic banking crises: a new database" (PDF). IMF WP/08/224. International Monetary Fund. Retrieved 2008-09-29.

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

2016/08/31 - Life Insurers Do Not Pose a Systemic Risk to the Nation’s Economy, BY DIRK KEMPTHORNE (president and chief executive officer of the ACLI

  • 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, April - 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