Regulatory

Run – Triggers

• Can’t Say
• Crisis in Confidence
• Disintermediation
• Reputational Risk
• Interest Rates

• Plenty of things could cause another run on insurance companies.
  • A devastating earnings report or financial filing could set one off.
  • So could comments from public officials.

2008 1114 – NYT – What Happens When Your Insurer Goes Under?, By Ron Lieber – [link]

• ⁵⁸⁵ The consensus among industry analysts is that once confidence is lost in an insurance company like AIG, policyholders will pull their policies, insurance agents will dissuade clients from purchasing insurance policies from the company, and that, in effect, all the insurance companies would have become ”run-off” businesses.

—  Panel staff conversations with industry analysts.

2010 0610 – COP – Report – The AIG Rescue, Its Impact on Markets, and the Government’s Exit Strategy – 337p

• 2011 1116 – GOV (House) – Insurance Oversight and Legislative Proposals – [PDF-131p]
  • (p21) – Mr. STIVERS (R-OH) – …it seems to me that it is hard to construct a circumstance where there would be some mass run on people borrowing on their life insurance accounts.
    • Can you help us, as a committee, understand your thought process there and what you were trying to build, because it really seems like the banking system would have to have collapsed or something out of that, and it just seems difficult to imagine.
  • Daniel SCHWARCZ.  Sure. ….people wouldn’t be doing that because they didn’t have money from banks.
    • What would happen is that there would be a massive loss of confidence in a particular life insurer say, several life insurers.
    • All of a sudden, big news stories broke about how they weren’t, they didn’t have money to pay claims.
    • People would then worry, I am not going to get anything, I better start going and taking out my cash to the extent I can from this life insurer, and then that would be exacerbated by the fact-again, this is a potential calamitous scenario, but we need to think about it-that State guarantee funds wouldn’t potentially cover all of the exposure out there.
    • So that is how it could occur. 

• What I noticed was there is a requirement for in-force illustrations, and people may have thought they bought one thing and whenever you have to give them an in-force illustration with a current disciplined scale, they’re going to realize they bought something else.
• I think many companies will have serious problems with policyholder retention.

  —  Mark J. Greene, FSA. MAAA, Supervising Actuary, New York State Insurance Department

1995 – SOA – Practical Illustrations and Nonforfeiture Values, Society of Actuaries – 14p

• It was noted, though, that premium increase could lead to other policyholder actions such as increased lapses and possibly reputational risk.

2018 – IAIS – Risk-based Global Insurance Capital Standard Version 2.0 Public Consultation – 31 July 2018 – 30 October 2018 Page 69 of 158

• 4.17 Policyholder “runs” are rare in insurance, though they have occurred in the past.
• Policyholders may have incentives to run, including, but not limited to:
  • (1) market movements (higher external returns, either spikes in interest rates or stock returns
    could lead to higher lapse rates, while higher internal returns, such as surplus participation, could lead to lower lapse rates);
  • (2) personal financial distress or liquidity concerns; and
  • (3) a general collapse of confidence in a company, product or industry.
• There have also been several instances where policyholders grew concerned about the financial condition of a firm, either through regulatory action or other public knowledge about potential problems of the firm.
  • These experiences did not necessarily have systemic implications, which potentially could have been caused by a variety of factors, such as regulatory intervention, the size of the insurer, or the normal economic environment.
  • On the other hand, most of the runs occurred at smaller insurance companies and during a normal economic environment and it is unclear what effect they might have had during a period of significant stress.

2017 0624 – BIS / IAIS – Systemic risk from insurance product features – [link] – 26p

• Greg Gurlick (Northwestern Mutual Life) said that if consumers are not satisfied with results of their IUL policies, it will not only impact the reputations of the companies selling the products but also the entire industry will be painted with a broad brush.

2014 11/14-15 – NAIC Proc. – IULSG -Index Universal Life (IUL) Illustration (A) Subgroup 

• Bank Atlantic vs. Richard X. Bove and Landenburg
  • int.nyt.com/data/int-shared/nytdocs/docs/476/476.pdf
  • (p199) – Deposition of Richard X. Bove
    • A. She <Sheila Bair> was saying that a couple of hundred banks would fail. I thought that was totally imprudent, totally incorrect, and should not have been said.
    • Q. Why was that imprudent and should not have been said?
    • A. Because these are people that are supposed to make sure that banks don’t fail.
    • Q. Why is it that publicly saying that all of these banks are likely to fail, why would you consider that to be imprudent?
    • A. Because it creates fear.
    • Q. And what is the problem of creating fear?
    • A. That it causes the banking system to freeze up. It causes it causes a hording of cash, both within the financial system and outside of the financial system, and that hording of cash results in a negative impact on the economy.
    • Q. All right. Then you go on to say: are no benefits by having prominent officials claiming that large financial institutions are “There failing, are insolvent, are incapable of raising funds, or that they should be allowed to fail.”