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Life Health > Life Insurance

Are Insurance Company Lenders Dangerous?

By Allison Bell

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Two economists are nervous about the idea of tougher bank regulation pushing corporate borrowers into the arms of nonbank lenders that might be less tightly regulated, or might be regulated in ways that are difficult for bank regulators to see.

Isil Erel and Eduard Inozemtsev look at those concerns in a working paper posted behind a log-in wall on the website of the National Bureau of Economic Research.

“We argue that the growth of nonbank lending exacerbates financial instability, especially in turmoil periods,” the economists write. “In the recent COVID-19 crisis, nonbank lenders contributed to disruptions in corporate borrowing across various debt markets.”

What it means: Life and annuity issuers have been talking about getting more high-quality investment assets by lending to companies and individuals directly.

Papers like the Erel-Inozemtsev report could eventually lead to changes in how regulators see life insurers’ lending programs and debt securities purchase programs. That might or might not affect the supply of life insurance policies and annuities that the insurers offer your clients.

Publication mechanics: A working paper is a research paper that has not yet been put through a full peer review and publication process.

The Journal of Financial and Quantitative Analysis has accepted the Erel-Inozemtsev paper for publication, according to Erel. The current version of the paper is a revision of a review paper that Erel posted on the web in 2021 and presented at a Federal Reserve Bank of Boston’s conference.

The paper: Erel, a finance professor at Ohio State, and Inozemtsev, a business faculty member at the University of Melbourne, acknowledge in their paper that the National Association of Insurance Commissioners oversees life insurers’ lending actively and that, because of regulatory constraints, insurers hold much higher-rated bonds than mutual funds tend to hold.

But Erel and Inozemtsev contend that active regulation of nonbanks could itself be a risk if poorly coordinated regulatory constraints force insurers to sell certain types of assets quickly and those “fire sales” lead to problems for banks.

The current shift to “mark to market” accounting, which may force insurers to post big losses if an economic crisis hurts the value of their bonds, could add to problems, the economists note.

With the mark-to-market rules in effect, “any downward pressure on portfolio holdings adversely affects capital requirements, leading to an asset sale and a further downward spiral in price,” the economists write.

Credit: Bruno Weltmann/Adobe Stock

Allison Bell

Think_Allison

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