Insurance Policy Holders Were Protected from Financial Crisis of 07-09′
By: Andrew Simpson (Insurance Journal) July 2013
At a time when efforts are underway to require additional supervision of some large insurers, a new government report concludes that the insurance industry’s own practices and the policies of state and federal regulators successfully shielded most of the $1 trillion insurance industry and most policyholders from the negative effects of the 2007-2009 financial crisis.
According to the report, most life and property/casualty insurers were in strong capital positions before the crisis and that regulatory responses helped limit the damage.
“While some insurers experienced capital and liquidity pressures in 2008, their capital levels had recovered by the end of 2009. Net income also dropped but recovered somewhat in 2009. Effects on insurers’ investments, underwriting performance, and premium revenues were also limited,” says the Government Accountability Office (GAO) report titled, “Insurance Markets- Impact of and Regulatory Response to the 2007-2009 Financial Crisis.”
However, there were two insurance segments that were affected by the financial crisis: life insurers that offered variable annuities with optional guaranteed living benefits, as well as financial and mortgage guaranty insurers—a small part (two percent of total industry premiums) of the P/C industry, according to the GAO.
Questions about the oversight of the insurance industry emerged during the financial crisis after giant holding company American International Group (AIG) suffered severe losses that threatened to affect the company’s insurance operations.
The GAO report notes that the AIG losses were brought about by activities of the company’s non-insurance unit, AIG Financial Products — activities that included securities lending — and not by its insurance operations.
The GAO found that actions by state and federal regulators and the National Association of Insurance Commissioners (NAIC) helped limit the effects of the crisis.
State regulators shared more information with each other to help focus their oversight activities. In response to issues highlighted by AIG’s securities lending program, the NAIC began requiring more detailed reports from insurers. Also, the NAIC changed a methodology to better reflect the value of certain securities and reduced the risk-based capital some insurers had to hold. Some states also changed reporting requirements for certain assets.
At the federal level, assistance from the Federal Reserve’s Commercial Paper Funding Facility and the Troubled Asset Relief Program (TARP) helped mitigate the impact, the report says. Also, the Federal Reserve Bank of New York and Treasury made more than $182 billion available to assist AIG between September 2008 and April 2009. AIG became one of the biggest recipients of federal assistance. Some other insurers also took federal assistance.
While overall the regulatory system rose to the occasion, some believe that the bailout of AIG and the assistance given some other insurers during the crisis revealed gaps in the regulatory system for large, interconnected, heavily-leveraged global financial institutions, according to the report.
Congress responded to the financial crisis and some of these concerns by passing the Dodd-Frank regulatory reform act to tighten supervision of “too-big-to-fail” financial institutions.
The GAO report comes at a time when the Financial Stability Oversight Council, which was created by the Dodd-Frank Act, has begun designating large insurance companies as systemically important and therefore subject to higher capital standards similar to those of banks and supervision by the Federal Reserve. The FSOC has already designated AIG as systemically important and is considering whether to also designate Prudential Financial Inc. and MetLife Inc. systemically important, which would make them subject to Fed supervision
Insurer trade groups, the NAIC and some individual insurers oppose the imposition of bank-like capital requirements and other rules on insurers, arguing that the insurance industry does not need additional supervision and did not cause the financial crisis.
These interests believe the GAO report bolsters their argument that applying bank rules to insurers is inappropriate.
NAIC President Jim Donelon, who is also Louisiana insurance commissioner, said the report “reconfirms” that the U.S. system of state insurance regulation effectively protected insurers and policyholders from the worst aspects of the financial crisis.
“States insurance regulators’ approach to solvency supervision and prioritizing protection for policyholders helped to minimize insolvencies and receiverships during the worst downturn since the Great Depression, and swift, coordinated action by the states through the NAIC helped regulators stay ahead of unfolding events,” Donelon told Insurance Journal in an email. “The report also highlights the actions taken by the states and NAIC to further strengthen our system of group supervision, to improve disclosures for securities lending, and to better assess the risks within insurer’s investment portfolios.”
The American Insurance Association (AIA) said the report points out that except for financial and mortgage guaranty business, the financial crisis “had little adverse impact on the highly-regulated property/casualty insurance industry and its policyholders.”
Willem O. Rijksen, AIA vice president of public affairs, said his group continues to believe that the property/casualty insurance business model and the industry’s regulated insurance activities do not pose a systemic threat. “Instead, that business model possesses features that actually add stability to the financial markets,” he said.
Rijksen said that the GAO’s report supports AIA’s position that the “potential application of bank-centric capital standards to property/casualty insurers is inappropriate and contrary to sound insurance regulation.”
The GAO report notes that the NAIC and state regulators have continued to address issues raised by the financial crisis. They have placed increased focus on insurers’ risks and capital adequacy and on oversight of non-insurance entities in group holding company structures. The NAIC developed the Own Risk and Solvency Assessment, an internal assessment of insurers’ business plan risks, which is expected to take effect in 2015. NAIC also amended its Insurance Holding Company System Regulatory Act to address transparency and oversight of holding company entities. However, most states have yet to adopt the revisions, the GAO said.
The GAO report also found that:
~The number of insurance company insolvencies, typically a low number, did not increase significantly during the financial crisis.
~Insurance industry investment practices and a low interest rate environment helped reduce the effects of the crisis.
~The crisis for the most part did not trigger events that life and P/C companies insure—death and property damage or loss.
~The crisis had a generally minor effect on policyholders, but some mortgage and financial guaranty policyholders received partial claims or faced decreased availability of coverage.
The study was requested by the House Subcommittee on Housing and Insurance of the House Committee on Financial Services. The GAO said it analyzed insurance industry financial data from 2002 through 2011 and interviewed industry observers, participants and regulators for the report.
