The Insurance Industry and the Great Recession, Part III - Why Did Life Insurers Seem More Susceptible to the Financial Strain from the Great Recession than Other Lines of Insurers?

Life insurers seemed particularly susceptible to the financial crisis of the late 2000s in part because of the type of products they issued as well as the types of investments they made.
The first part of this article discussed the fact that, despite public perception to the contrary, widespread insurance company insolvencies were not part of the global crisis that occurred in the last 2000s. The second part of this article illustrated the fact that the common perception that the federal government bailed out the insurance industry during the financial crisis in the Great Recession is largely incorrect. As part of this ongoing series, the focus now turns to why life insurance companies, in particular, were more heavily impacted by the financial crisis than other types of insurance companies.

While insurance companies generally invest in relatively safe assets and thus were able to survive the Great Recession without significant financial strain, the weak financial markets imperiled life insurance companies more than other types of insurers for two main reasons.[1]

The first reason arises from the popularity of variable annuities, and its use as an income replacement tool for many retirees.
...many of the roughly two dozen insurers that dominate the variable-annuity business made aggressive promises on these popular retirement-income products, guaranteeing minimum returns, no matter what happened to the stock market.[2]
When the stock market declined, these life insurers were still bound by the contractual minimum guarantees. Although many of the guaranteed payments were not yet due to be paid, the effect on the financial projections of these insurers was significant.[3]

Even the relatively safe investments which backed insurers' policies suffered during the financial crisis.
The second reason that life insurers were more susceptible to the financial strain of the Great Recession was that even the relatively safe investments which backed the insurers' policies suffered during the financial crisis.[4]
Like other financial firms, life insurance companies were hit hard with the crashing credit and equity markets due to their large investment portfolios in bonds, real estate and other asset classes. In addition, life insurance companies took losses in their variable annuities businesses, which promise minimum payouts even if markets fall.[5]
Insurers owned as much as 18% of outstanding corporate bonds at the time.
At the time of the Great Recession, the American Council of Life Insurers reportedly estimated that insurers owned as much as eighteen percent (18%) of the outstanding corporate bonds. Additionally, many life insurers held significant investments in residential mortgage and real estate assets. During the financial crisis, almost all of these assets suffered losses of varying degrees.[6]
The life insurance industry took a beating in 2008 and for much of 2009, both in diminished sales and eviscerated balance sheets. But outside of American International Group Inc., whose problems were and are too unique to be compared to the industry at large, it never faced a "run on the bank" situation.[7]
Insurers of all lines generally had adequate reserves and surplus.
In the end, however, despite the significant strain faced by many insurers during the Great Recession, insurers of all lines generally had adequate reserves and surplus backing their policies, as well as the state-run insurance guaranty association systems to address any insolvencies.[8]

This, combined with the fact that only two insurance companies ultimately took TARP funds, has caused some insurance industry analysts to question why the federal bailout was extended to the insurance industry, and what purpose it ultimately served.[9]

Part IV of this article will address the federal government's regulatory response to the Great Recession as it affects the insurance industry, as well as the applicability of that response to the most visible insurance-related entity involved in the financial crisis: AIG.

1U.S. to Offer Aid to Life Insurers, Scott Patterson, Deborah Solomon and Leslie Scism, Wall Street Journal, April 8, 2009.
2U.S. to Offer Aid..., id.
3U.S. to Offer Aid..., id.
4U.S. to Offer Aid..., id.
5U.S. Approves TARP Funds For Life Insurance Companies; Hartford (HIG) Set To Receive $3.4B,, May 14, 2009.
6U.S. to Offer Aid..., id.
7Lincoln's TARP Exit Closes Strange Chapter in Bailout, R.J. Lehmann, Insurance Insight,, June 22, 2010.
8Lincoln's TARP Exit..., id.
9Lincoln's TARP Exit..., id.

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