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:
1.
A 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.
2.
U.S., European Bank Writedowns, Credit Losses, Reuters, November 5, 2009.
3.
The Great Crash, 2008, Robert C. Altman, Foreign Affairs, January, 2009.
4.
Lehman Files Biggest Bankruptcy Case as Suitors Balk, Yalman Onaran and Christopher Scinta, Bloomberg, September 15, 2008.
5.
Seven Things We Know About Insurance and the Financial Crisis – That Aren't True, Peter G. Gallanis, NOLHGA Annual Meeting, October, 2011.
