Comments on: Regulatory arbitrageurs of the day, insurance edition http://blogs.reuters.com/felix-salmon/2013/09/12/regulatory-arbitrageurs-of-the-day-insurance-edition/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: realist50 http://blogs.reuters.com/felix-salmon/2013/09/12/regulatory-arbitrageurs-of-the-day-insurance-edition/comment-page-1/#comment-48081 Fri, 13 Sep 2013 19:18:15 +0000 http://blogs.reuters.com/felix-salmon/?p=22477#comment-48081 dsquared – that logic applies to every company, whether an insurer, some other type of financial firm, or a non-financial manufacturing or service company. The probability of any company becoming bankrupt in a given timeframe is north of zero, so over a long enough period of time it approaches 100%. Not sure if that tells us much beyond placing value on dividends and remembering the uncertainty of long-term forecasts.

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By: dsquared http://blogs.reuters.com/felix-salmon/2013/09/12/regulatory-arbitrageurs-of-the-day-insurance-edition/comment-page-1/#comment-48075 Fri, 13 Sep 2013 07:16:24 +0000 http://blogs.reuters.com/felix-salmon/?p=22477#comment-48075 ” I’d say that it’s such an overstatement as to be moronic”

It’s surely just a (presumably humorous) restatement of the gambler’s ruin theorem. All insurers, apart from odd runoff stories with more capital than liability, have positive probability of ruin, and something with positive probability of ruin will be ruined in finite time with probability 1.

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By: realist50 http://blogs.reuters.com/felix-salmon/2013/09/12/regulatory-arbitrageurs-of-the-day-insurance-edition/comment-page-1/#comment-48074 Fri, 13 Sep 2013 02:59:17 +0000 http://blogs.reuters.com/felix-salmon/?p=22477#comment-48074 “A money manager once told me that all insurers go bankrupt eventually; it’s just a question of when.”

I wouldn’t say that this statement is merely “exaggerated a little for effect”. I’d say that it’s such an overstatement as to be moronic. Relatively few large insurers have ended up insolvent – and the most notable one (AIG) did so for reasons having nothing to do with its traditional insurance businesses.

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By: crocodilechuck http://blogs.reuters.com/felix-salmon/2013/09/12/regulatory-arbitrageurs-of-the-day-insurance-edition/comment-page-1/#comment-48071 Thu, 12 Sep 2013 20:57:16 +0000 http://blogs.reuters.com/felix-salmon/?p=22477#comment-48071 “We desperately need a national insurance regulator”

Felix, a national insurance regulator would be promptly gamed by the industry and self neutered via regulatory capture and you’d see the same BS as you now have with the SEC, the OCC, FINRA, etc.

Better to keep insurance regulation at the state level, where its too difficult to do so.

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By: SamChevre http://blogs.reuters.com/felix-salmon/2013/09/12/regulatory-arbitrageurs-of-the-day-insurance-edition/comment-page-1/#comment-48070 Thu, 12 Sep 2013 19:27:30 +0000 http://blogs.reuters.com/felix-salmon/?p=22477#comment-48070 I work in this field–a couple of notes that may be useful.

Life insurance is different from all the other sorts in one way; there’s a table for risk (mortality) that is agreed, by everyone in the industry and 49 of the 50 state regulators, to be far too high for underwritten life insurance. Some insurers like it anyway–either because it reduces tax liabilities or because they think it hurts their competition more than it hurts them–but no one thinks it’s accurate. It’s not like property insurance, where the risks are iffy–how many people die annually is a well-studied issue.

Second, to dWj’s point, the whole quarrel is over the use of subordinated debt in one form or another. The reason you use a captive is to be able to have debt that is subordinated to a defined insurance risk (and the reason you want that is that everyone knows that reserving mortality is too high, so captive debt is much lower-interest than general corporate debt.)

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By: SamChevre http://blogs.reuters.com/felix-salmon/2013/09/12/regulatory-arbitrageurs-of-the-day-insurance-edition/comment-page-1/#comment-48068 Thu, 12 Sep 2013 19:04:47 +0000 http://blogs.reuters.com/felix-salmon/?p=22477#comment-48068 I work in this field–a couple of notes that may be useful.

Life insurance is different from all the other sorts in one way; there’s a table for risk (mortality) that is agreed, by everyone in the industry and 49 of the 50 state regulators, to be far too high for underwritten life insurance. Some insurers like it anyway–either because it reduces tax liabilities or because they think it hurts their competition more than it hurts them–but no one thinks it’s accurate. It’s not like property insurance, where the risks are iffy–how many people die annually is a well-studied issue.

Second, to dWj’s point, the whole quarrel is over the use of subordinated debt in one form or another. The reason you use a captive is to be able to have debt that is subordinated to a defined insurance risk (and the reason you want that is that everyone knows that reserving mortality is too high, so captive debt is much lower-interest than general corporate debt.)

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By: SamChevre http://blogs.reuters.com/felix-salmon/2013/09/12/regulatory-arbitrageurs-of-the-day-insurance-edition/comment-page-1/#comment-48067 Thu, 12 Sep 2013 18:58:27 +0000 http://blogs.reuters.com/felix-salmon/?p=22477#comment-48067 I work in this field–a couple of notes that may be useful.

Life insurance is different from all the other sorts in one way; there’s a table for risk (mortality) that is agreed, by everyone in the industry and 49 of the 50 state regulators, to be far too high for underwritten life insurance. Some insurers like it anyway–either because it reduces tax liabilities or because they think it hurts their competition more than it hurts them–but no one thinks it’s accurate. It’s not like property insurance, where the risks are iffy–how many people die annually is a well-studied issue.

Second, to dWj’s point, the whole quarrel is over the use of subordinated debt in one form or another. The reason you use a captive is to be able to have debt that is subordinated to a defined insurance risk (and the reason you want that is that everyone knows that reserving mortality is too high, so captive debt is much lower-interest than general corporate debt.)

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By: dWj http://blogs.reuters.com/felix-salmon/2013/09/12/regulatory-arbitrageurs-of-the-day-insurance-edition/comment-page-1/#comment-48065 Thu, 12 Sep 2013 16:03:37 +0000 http://blogs.reuters.com/felix-salmon/?p=22477#comment-48065 You don’t need equity per se; you need liabilities that are subordinate to the insurance claims. If MetLife can’t, given a reasonable amount of time, raise capital through issuance of equity, preferred equity, and subordinated debt at returns “required by investors”, they shouldn’t be in business.

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