FED WATCH: A glimpse into how the Federal Reserve might view insurance companies’ place in the supervision of the financial services arena in the Dodd-Frank world was provided by a recent presentation by a member of the Chicago Fed Insurance Initiative (yes, there is one.)
The glimpse is important as the parent Federal Reserve in Washington sits on a committee that will help decide which insurance companies, if any are SIFIs, or “systematically important financial institutions.”
Even one such SIFI designation could have future regulatory requirement implications for the regulation and overall supervision of many other companies in the marketplace and federal governments, as state and federal regulators jockey to make sure the companies they supervise are on the right track.
Anna Paulson, vice president and director of financial research in the economic research department at the Federal Reserve Bank of Chicago, spoke March 2, 2012 at the New York University Stern Insurance Conference, but presented her views as that of her own, not the Fed’s, in the typical disclaimer for presentations.
The so-called Chicago Fed Insurance Initiative is designed, it states, to be a source of insurance expertise for the Federal Reserve System, and to understand the role of the industry, both life and property and casualty, motivated by the importance of the insurance industry in the overall economy, as well as the key role the industry plays in households al the way to financial markets.
The Initiative has five members, who appear to be non-insurers, but, like Paulson, Ph.Ds in economics and research professors from prestigious universities and research professors.
Paulson, with a Ph.D in economics from the University of Chicago and on staff with the Fed since November 2001, said in her presentation, “The Risk of Insurance Companies,” that yes, runs on insurance companies do indeed occur, recently, in fact, citing the 1999 case of General American, when “7 day puts” were called in to the tune of over $6 billion–contract holders only needed seven days to call in their money, which they did when the company was downgraded by Moody’s.
As the American Academy of Actuaries pointed out that year, “although General American had the assets, they were not liquid enough, so the company went under state supervision.”
Paulson noted in her report that some insurer liability is very liquid, citing deferred annuities and guaranteed investment contracts (GICs), and other funding agreements. Whole Life. payout annuities and liability insurance are product examples of low to no liquidity. Paulson broke down the liquidity, from none to high liquidity, by percentage, of the industry as a whole, and by top 10 life insurer, by liabilities.
Although she didn’t seem to draw conclusions, the mutuals, Northwestern Mutual and New York Life seemed the most conservative by percentage in moderate to high liquidity, and The Hartford, ING Groep and Lincoln National among the highest, by percentage.
Paulson also noted that increased regulation of insurers –she didn’t say from whom–can “help to internalize externalities that might lead to the build up of systemic risk.”
As an example, she noted that capital surcharges on systemically important financial institutions help to internalize the cost of being too big to fail.
Paulson also countered the general insurance company and insurance commissioners’ claim that “insurers did fine during the crisis, so we don’t need to worry about them,” with citations of not only AIG, but Lincoln National and The Hartford, which both took Troubled Asset Relief Program (TARP) funds, although much later than did the banks.