Insurance Won’t Suffer S&L-Like; Collapse
Big questions are being asked about insurance--whether the companies that insure your life or your business can stand up to an economic hurricane themselves.
The life insurance industry, one of the mightiest oaks in the U.S. financial landscape--with $9 trillion in face value of policies and more than $1 trillion invested in securities, real estate and commercial mortgages--is being questioned on its ability to meet policyholder claims if real estate and junk bond values continue to slide.
On Monday, the property-casualty side of the industry--$200 billion a year in premiums to cover trillions worth of automobiles, homes and businesses--was challenged by Public Citizen, the Ralph Nader group in Washington, on whether it could withstand a severe recession.
Some alarmists, linking insurance with the savings and loans, say the industry threatens taxpayers and policyholders with big losses.
But such views are extreme. Policyholders won’t lose--although they could be discomforted--and taxpayers shouldn’t lose either. The likelihood is that insurance will work out of its problems in the years ahead, although its troubles will mean less money available for investment in industry and real estate.
Like so many other financial chuckholes left over from the 1980s, insurance’s troubles will make life a little poorer for Americans in the ‘90s. So you should know what all the shouting is about.
Some of the present concern can be discounted as political gamesmanship--such as the Nader group’s call for Congress to change laws governing property-casualty insurers. “Concern about solvency on that side of insurance is misplaced,” says Herbert E. Goodfriend, insurance analyst with Prudential-Bache Securities. Property companies are better-heeled than ever, he said.
But more genuine questions are being asked about life insurance. IDS Financial Services, through its own insurance division, issued a study recently suggesting that 20% of the largest insurance companies would run into serious trouble if changes were not made.
David Shulman, real estate expert at the Salomon Bros. investment firm, predicted in June that insurance companies would run into defaults on commercial mortgages in 1991. Today, he says, “the recession has brought forward the day of reckoning.”
Prudential’s Goodfriend notes the recent $650-million increase in loss reserves by Travelers Insurance and predicts that half a dozen large insurers will have to set aside similar, if smaller, reserves against investment losses.
The problems reflect not only the slumping economy, but changes in life insurance as it went from a dull, reliable business that sold you a policy and paid off when you died, to a performance-oriented high-flyer. Where the industry once invested most conservatively in bonds and properties, in the last decade it reached for higher yields in junk bonds and more speculative real estate.
The higher yields allowed insurers to compete for investor dollars by offering annuities and other investment policies--all with a tax-deferred buildup of income.
The industry also reached for pension business, offering to guarantee retirement payouts to employees with investment contracts. Today, many big companies face losses on those high-interest guarantees--notably Equitable Life, which could lose as much as $1 billion. To put that in perspective, the firm has $62 billion in assets.
Commercial real estate is a growing problem--office vacancy rates are up in many parts of the country. That means rental income and thus insurance company cash flows will be down.
What if a company gets in trouble? There is an industry guarantee system in which all companies chip in to rescue the policyholders of the ailing member. Policyholders won’t lose, although as creditors they may have to wait for their money. And, note well, the industry’s guarantee system isn’t backed by regulation in some states, prominently New Jersey and California.
On the other hand, the industry’s strength should be kept in mind. The great mass of life insurance investments are in high-grade securities and sound real estate. That’s why fears of catastrophe are overdone. The industry needs to rebuild the financial equivalent of porch rails and fences, not the whole house.
So insurance companies will pull in their horns in the ‘90s, building up capital and reserves, and limiting investment--another sore muscle for the U.S. economy but not a mortal injury.
The industry’s troubles offer yet another reflection on the 1980s. It is being called the decade of greed, but it was something else--a time of institutional mania. Some of the biggest--and supposedly smartest--companies are troubled. They took simple ideas to extremes--that high-yielding bonds might not be riskier than high-quality ones, that all real estate is a sound investment.
It was really a decade of blind optimism. But as we recover now, we shouldn’t fall victim to blind pessimism. The ‘80s weren’t as good as people thought they were, and the ‘90s won’t be as bad as they fear.
