The Insurance Industry and the Great Recession, Part I - Rising Federal Involvement in Insurance Regulation

Despite public perception to the contrary, the insurance industry survived the Great Recession relatively unscathed. Nevertheless, the myth of widespread insurance insolvencies has fueled increasing federal involvement in insurance regulation.
In discussing the history of insurance regulation, Insurance Regulatory Law explained that the insurance industry avoided the layers of New Deal federal regulation that befell the banking and securities industries in the mid-1930s primarily because the insurance industry survived the Great Depression largely intact.
The New Deal federalization arose from the failure of the state-based banking and securities regulators associated with the Great Depression, but the relatively healthy insurance industry showed little evidence of any similar faults on the part of the state-based insurance regulators. [1]
With respect to the Great Recession however, the insurance industry has not avoided federal involvement in insurance regulation despite remaining on the periphery of the most recent financial crisis.

The Great Recesssion was a global financial crisis that has sparked rising federal involvement in insurance regulation.
The Great Recession, also known as the Late-2000s Financial Crisis, the Lesser Depression and the Long Recession, was a global recession that involved the collapse of large financial institutions, the bailout of banks by national governments and downturns in stock markets around the world. Arguably, the Great Recession may have laid the groundwork for the eventual eclipse of the long-standing state-based system of insurance regulation in favor of a slowly but steadily growing federal insurance regulatory scheme.

However, this new rise of federal involvement in insurance regulation did not come about because of a failure of the state-based system – indeed, much like the Great Depression, the insurance industry faired relatively well through the Great Recession, despite public perception.

At the Annual Meeting of the National Organization of Life and Health Guaranty Associations ("NOLHGA") in October of 2011, Peter G. Gallanis, President of NOLHGA, made a presentation addressing certain public misconceptions about the insurance industry and the financial crisis.

While the Great Recession brought global financial hardship, the insurance industry remained comparatively unscathed.
According to Gallanis, a commonly-held public misconception is that the financial crisis in the late-2000s involved widespread and systematic failures of insurance companies across the country. Remarkably, while the Great Recession brought financial hardship on a global scale, the insurance industry remained comparatively unscathed, at least in terms of financial solvency.

The International Monetary Fund has estimated that large U.S. and European banks lost as much as $2.8 trillion in toxic assets and bad loans from 2007 to 2010.[2] More than 100 mortgage lenders went bankrupt during 2007 and 2008. During the Great Recession a number of major financial institutions failed, were acquired under duress or were taken over by the government, including Lehman Brothers, Bear Stearns, Merrill Lynch, Fannie Mae, Freddie Mac, Washington Mutual, Wachovia and AIG.[3] In fact, Lehman Brothers was the largest bankruptcy filing in U.S. history at the time, listing its debt as more than $613 billion.[4]

In contrast, the insurance industry suffered only relatively minor failures, none of which were on a systemic scale. There were approximately 11 small insurance company insolvencies in the U.S. during the financial crisis, with aggregate policyholder liabilities of $955 million.[5]

A comparison between all of the insolvencies experienced by the insurance industry during the financial crisis and just the Lehman Brothers bankruptcy shows just how well the insurance industry faired through the Great Recession.
Thus, the public perception that the Great Recession involved widespread insurance company insolvencies appears to be unfounded.

Part II of this article will address another commonly-held misconception about the insurance industry and the Great Recession by answering the question: did the federal government rescue the insurance industry during the financial crisis?


1A Brief Chronicle of Insurance Regulation in the United States, Part I: From De Facto Judicial Regulation to South-Eastern Underwriters Ass'n, Van R., Mayhall, III, Insurance Regulatory Law, May 16, 2011, citing Stemple on Insurance Contracts; Jeffrey W. Stempel, Vol. 1, §2.07, 3rd Ed., 2007.
2U.S., European Bank Writedowns, Credit Losses, Reuters, November 5, 2009.
3The Great Crash, 2008, Robert C. Altman, Foreign Affairs, January, 2009.
4Lehman Files Biggest Bankruptcy Case as Suitors Balk, Yalman Onaran and Christopher Scinta, Bloomberg, September 15, 2008.
5Seven Things We Know About Insurance and the Financial Crisis – That Aren't True, Peter G. Gallanis, NOLHGA Annual Meeting, October, 2011.

1 comment:

  1. Were these 11 Insurance companies that went insolvent classified as admitted or non admitted companies?
    I often wonder with the federal government bailing out AIG which is considered a non-admitted insurance company in my domiciled state of California, will regulation later be construed that all non-admitted insurance carriers be bailed out by the fed when such an insurance carrier goes insolvent?
    If so it would seem that non-admitted insurance carriers would be a far better deal then admitted insurance carriers who if they go insolvent would bailed out by the state of California or any other state on the verge of insolvency itself.

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