Rathbun: Also too big to failWritten by Gary Rathbun | | GaryRathbun@PrivateWealthConsultants.com
Recently, I read several articles from a diverse number of sources that talked about the insurance companies in the United States and how some of them are altering their books by billions of dollars putting policyholders at risk potentially leading to another taxpayer bailout. In addition, regulators are proposing to designate several insurers as too big to fail (TBTF) saying that these “nonbank financial companies” are “systemically important” and their failure could destabilize the financial markets.
I have been closely involved with the insurance market for more than 30 years and during that time, there have been very few insurance companies that failed. Most of the time when an insurance company starts to get into trouble, another company comes along and takes over the book of business and keeps the policyholders from experiencing any loss of coverage.
Life insurance companies, especially, have always been seen as very stable and the assets have been very conservative and secure. During the last 30 years, I have seen several major economic problems and insurance companies have always weathered the storms very well.
What is starting to come out now, however, is some insurance companies are using secretive transactions that could affect trillions of dollars of life insurance policies, according to analysis done for The New York Times by SNL Financial, a research and data firm.
Independent rating firms use financial data from the insurance companies to determine their financial soundness and rate each company. Insurance companies value these ratings as do customers who use them to determine what company to use to insure their risks. It is very important that the financial date be accurate and accessible. An insurance company and their policies are only as good as the company is solvent. Without adequate reserves and liquidity, they wouldn’t be able to pay any claims and quite honestly, the only reason we buy insurance is so that it will pay when we have a claim.
It is being determined that some of these companies are using very complex private deals in shell companies in other states or countries outside of the regulators’ view, according to The New York Times article. These private deals, which are very hard to track, allow companies to appear much more solvent and stronger than they really are. This could cause a real problem in the future if policyholders have an unusual amount of claims and a company has trouble paying the claims.
This type of financial sleight of hand is one more factor in encouraging U.S. regulators known as the Financial Stability Oversight Council, sanctioned under the 2010 Dodd-Frank law, to start getting involved and cracking down on certain insurance companies.
A recent CNBC.com article named several major insurance company that may soon be classified as TBTF since their failure might cause financial destabilization in the market. Regulators did not name any specific company, but several companies did say they had been notified by the risk council and proposed designating them as “systemically important.”
I am sure companies will resist falling under that scrutiny, at least in public, but we have seen the behavior banks engage in when they have the safety net of the American taxpayer. The nonbank firms that the council has so far designated as systemically important handle trillions of dollars of transaction and adding the major insurance companies will add trillions of dollars more to the taxpayer safety net.
From my point of view, the Financial Stability Oversight Council, and probably the entire Dodd-Frank legislation, should be scrapped and let the free market determine who survives and who goes under. It would put more responsibility on the policyholder, but I think that is a good thing.
I still believe the adage, “if a company is too big to fail, then it is too big to succeed.”
Gary L. Rathbun is the president and CEO of Private Wealth Consultants, LTD. He can be heard on 1370 WSPD at 4:06 p.m. on After the Bell, everyday on the Afternoon Drive, and every Tuesday, Wednesday and Thursday at 6 p.m. and Monday through Friday at 10 p.m. throughout Northern Ohio on Eye on Your Money. He can be reached at (419) 842-0334 or email him at email@example.com
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