Amidst the turmoil of the financial industry, it is good to know that one part of it, the insurance industry, is on sound footing.
The financial crisis in within the commercial, thrift, and investment banking industries. Essentially, the banking industry fell in love with subprime mortgage and other investment vehicles for bundling, selling, re-selling, and re-re-selling these bad mortgages. It was the old game of putting old wine in new bottles.
Even though American International Group almost went bankrupt, its insurance subsidiaries were in sound condition. AIG was brought down by insuring subprime mortgage securities. However, its traditional insurance companies were and are healthy and able to defend cases and pay claims.
The reason why the insurance company is in good shape as compared to the banking industry is because the individual states regulate the insurance industry. The individual state insurance departments have done a good job of keeping the industry honest. The same cannot be said of the regulators of the banking industry on both the state and federal levels. Indeed, the trend has been to deregulate the banking industry and to break-down the barrier between commercial banking and high-risk investment banking. Congress has the blame for deregulating banking.
Fortunately, the insurance departments of the states have not been seduced into deregulating. The various insurance departments have done a good job at making sure that insurance companies are solvent and can pay claims. This is so because the leading states, where insurance companies are either headquartered or licensed to do business, have stringent requirements that insurance companies set aside liquid reserves to pay claims and expenses. No such requirement existed for the glamorous and big earners of finance, such as Bear. Stearns, and Merrill Lynch.
We can be thankful that the insurance regulators have been a conservative, stubborn, and unexciting bunch who have resisted the “deregulation bandwagon.”
Mark E. Seitelman, 9/21/08, www.seitelman.com.