Dots – Policyholder Runs

Dots - Policyholder Runs

2015 1119 Oversight of FSOC - Wagner

[Have there ever been Runs on Life Insurance Companies? Yes]
1991 - FRB - Monetary Policy and Open Market Operations During 1991 - 123p
- Many life insurance companies had been hurt by declining real estate values, as banks had been, and by losses on their holdings of below-investment-grade bonds.
  - These difficulties came under the spotlight during the summer, following the failure of Mutual Benefit Life Insurance Company.
  - In all, six major life insurance companies failed during 1991, all but one of which experienced runs by policy holders before their failure.
  - Other insurers, meantime, found themselves in weakened capital positions.
1980s - (FTC, Belth, Booth, Volcker, Federal Reserve, BTID)
1990s - Mutual Benefit, Executive Life, Pyramid Life, Baldwin United.
2002 1010 - GOV (House) - The Collapse of Executive Life Insurance Co. and Its Impact on Policyholders [PDF-277p
- Statements of James P. Corcoran, Former Insurance Commissioner, State of New York -
  - Yes, There Have Been Policyholder Runs on Life Insurance Companies
  - The only delay that occurred, there was a 10-day delay between the seizure of the parent company in California and the New York company.
  - There was a run on the bank, quite extensive run of the bank in that 10-day period in New York, but the company was able to withstand that.
  - Ultimately, the company was taken over by MetLife and the policyholders in New York were made whole. (p48)
2010 0610 - COP - Report - The AIG Rescue, Its Impact on Markets, and the Government’s Exit Strategy, Congressional Oversight Panel --- [BonkNote] --- 337p
- (p117) - ⁴⁴⁸ Panel staff call with National Association of Insurance Commissioners (Apr. 27, 2010).
  - The NY insurance regulators have provided Executive Life of New York as an example of seizure not being automatic for solvent insurance subsidiaries upon the bankruptcy filing of the holding company but later becoming necessary;
  - the NY insurance regulators seized Executive Life of New York insurance subsidiaries several months after the parent company bankruptcy filing because a run on the insurance subsidiaries had developed. Panel staff conversation with New York State Insurance Department (June 3, 2010).
2014 0310 - Letter - Sheila C. Bair to Senator Sherrod Brown (D-OH) - 6p
- Even if we concede these differences, insurance policy holders can “run,” just differently.
  - A life insurance policy is not indentured servitude.
  - Policyholders can cash out whole life and annuity products, and halt premium payments on term products.
  - Indeed, one of the biggest life insurance failures – $15 billion Executive Life – suffered debilitating policy surrenders contributing to its failure in 1991.
2017 0624 - BIS / IAIS - Systemic risk from insurance product features - [link] - 26p
- 4.17 Policyholder “runs” are rare in insurance, though they have occurred in the past. (p
Daniel Schwarcz
[More]

[Have there ever been Runs on Life Insurance Companies? No]
2017 0328 - GOV (House) - The Arbitrary and Inconsistent Non-Bank SIFI Designation Process, Ann Wagner (R-MO) --- [BonkNote] --- [PDF-83p, VIDEO-YouTube]
- (p14) - Paul KUPIEC (Resident Scholar, American Enterprise Institute):
  - Yes, and the designations for the insurance companies, the way the FSOC makes it, is very unusual in that it treats the products of insurance companies as if they were bank deposit like liabilities that could be withdrawn, that people would line up and withdraw the residual value of their life insurance policies or whatever.
  - And they are not bank deposit-like products, and there is really no evidence that there have been any institution-wide runs on all the various subsidiaries at any time in the past.
    - So the story is a very fictional story that the FSOC uses to make the designation.
- (p29) - Dennis ROSS (R-FL). And so, has there ever been a run on an insurance company in the history of the United States?
- Douglas HOLTZ-EAKIN. No.
  - One of the mysteries of this designation has been ignoring the history of successful regulation of insurance companies and also the use of scenarios which are completely unrealistic for that insurance business.
- Dennis ROSS (R-FL). Would you agree that there is no reason to deviate from the State-based system that we have today, where we have never seen a run on an insurance company, where a whole different method of assessment and analysis of your risk is used as opposed to financial institutions?
- Paul KUPIEC. I don’t think insurance merits a SIFI designation. I think AIG was a special case.
- Dennis ROSS (R-FL). It was a special case.
MetLife - (MetLife v FSOC Document 85-2/3)
GOV - Wagner - MO

[Q: Are Runs in the Future Possible / Likely? - Yes]
FSOC
- Prudential
- MetLife
1994 04 - CBO - The Economic Impact of a Solvency Crisis in the Insurance Industry - Congressional Budget Office - 80p
- Life insurers, whose liabilities are generally more liquid than their assets, are particularly vulnerable to runs by policyholders. (page x)
1992 - SOA [ Is there Life After Executive Life? Retirement Plan Participants and the Guarantees of Insurance Companies, Society of Actuaries - 22p

[Q: Are Runs in the Future Possible / Likely? - No]
ACLI - Dirk
NAIC - Hamm
FSOC Insurance Expert - Woodall
2015 DOC 100-4 - Transcript MetLife/FSOC Meeting 2014 11 03 - 190p
- (p18) - Steve Kandarian, the CEO, Chairman, and President of MetLife
- Destabilizing runs have not and will not occur in the insurance industry, for the reasons I just mentioned.
  - So, my point there isn't that an insurance can't fail.
- My point is that it is not the kind of failure that you see that causes panic, that causes people to take rash actions and move very, very quickly.
- So if people panicked about something, the insurance regulators have a right to step in.
  - They can slow things down.
- It is a much slower process in terms of unraveling an insurance company that is in trouble..

[Q: What could Trigger Policyholder Runs on Life Insurance Companies?]
SOA
- 1) Future Shock
- 2) other
Reputational Risk
- - 1979 0930 - NYT - The Appeal of Life Insurance Fades, But Most Families Still Buy It, by Edwin McDowell --- [BonkNote] --- [link]
    - ACLI - “If it's a savings account, why do you pay interest on it when you borrow?” asked Blake Newton, president of the American Council of Life Insurance.
      - “Why is it extinguished when you die?”
  - 1982 - SOA - Programs to Conserve Traditional Life Insurance Policies, Society of Actuaries - 18p
    - George R. Dinney - Disintermediation of traditional life insurance is most severe for policies sold as savings instruments.
  - 1988 - SOA - Actuarial Opinion on Non-Guaranteed Elements, Society of Actuaries - 12p
    - ACLI - Larry R. Robinson, Chairman of the ACLI Subcommittee on Cost Comparisons
      - As a backdrop, I want to quote from a January 1988 Financial Planning article. The article is entitled "Future Shock" by Harry Lew with the sub-heading:"What will happen when a generation of insurance buyers begins comparing unrealistic illustrations with the actual performance of their policies? Industry leaders would prefer not to find out." --- <WishList - Article>
  - 1993 0525 - GOV (Senate) - When Will Policyholders Be Given The Truth About Life Insurance?, Howard Metzenbaum (D-OH) --- [BonkNote]
    - (p13) - Policyholder - Statement of Gloria Darleen Newberry, Policyholder - The agent said that Universal Life policy premiums would stay the same, but I came to realize that this is not true of our policies.
      - ...what bothers me is that I am afraid that this same misleading information may be the basis of my children's and grandchildren's ... planning...
    - (196) - Senator Howard Metzenbaum (D-OH), Letter to the NAIC - Overwhelming numbers of Life Insurance buyers do not even understand which, if any, elements of their sales illustrations are guaranteed.
      - For instance, as we demonstrated in our hearing, an Alexander Hamilton illustration did not make it clear that there was no guaranteed death benefit after 12 years.
  - 1995 - SOA - Practical Illustrations and Nonforfeiture Values, Society of Actuaries - 14p
    - Mark J. Greene, FSA. MAAA, Supervising Actuary, New York State Insurance Department
      - ...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.
  - 1998 - Report of The Metropolitan Life Insurance Companies Located In New York, New York As Of December 31, 1998, By Examiners of The State of New Jersey Department of Banking And Insurance Division of Enforcement And Consumer Protection Market Conduct Examination Unit - 44p
    - (p27) - In its June 7, 1994 Consent Order #94-102, the NJDBI cited N.J.S.A. 17B:30-3 and N.J.A.C. 11:2-23.4 and subsequently fined MetLife $965,555 for MetLife’s practice of misrepresenting life insurance to be retirement or savings plans, particularly in advertisements sent to nurses and other professionals.
    - This action was taken based on the findings of a task force established by the National Association of Insurance Commissioners. Mis-Selling, Premiums / Benefits / LIRP /
  - 2014 11/14-15 - NAIC Proc. - IULSG - Index Universal Life (IUL) Illustration (A) Subgroup
    - 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 1218 - LC - MetLife v. FSOC - D85-2, 85-2 - 15-cv-45 - Explanation of the Basis of the Financial Stability Oversight Council’s Final Determination that Material Financial Distress at MetLife Could Pose a Threat to U.S. Financial Stability and that MetLife Should be Supervised by the Board of Governors of the Federal Reserve System and Be Subject to Prudential Standards --- [BonkNote] --- 387p
    - (p172) - [LIRP / Life Insurance Policy as Investment / Retirement Plan/ Savings / Investments / Assets] -
      - (p172) - Many life insurance and annuity products are purchased not only to pay death benefits in the event of the death of the insured, but also as a long-term investment vehicle to accumulate assets for savings or retirement.
      - If policyholders were to lose confidence in the ability of MetLife’s insurers to satisfy their obligations, they may prefer to bear the costs of surrendering their policies instead of risking potentially larger losses.
      - (p171) - MetLife markets this “tax-free” withdrawal strategy across various insurance products that accumulate cash value.⁸²³
        
        ⁸²³- For example, MetLife marketing material states that cash value life insurance can “Provide a smart way to save through its cash value. This is money that can be used for college, emergencies or during retirement without tax implications.” See MetLife, “Life Insurance as an Asset,” (2012),
    - (p172) - [Policy Loans] - Moreover, if policyholders wanted to keep their life insurance policies in effect, they could take out policy loans, which could also subject MetLife to a liquidity strain.
- Solvency
  - 1995 - AP - Perceptions and the Politics of Finance: Junk Bonds and the Regulatory Seizure of First Capital Life, by Harry DeAngelo, Linda DeAngelo, and Stuart C. Gilson - 37p
    - In May 1991, one month after seizing Executive Life, California regulators seized First Capital Life (FCLIC).
    - Both insurers were Drexel clients with large junk bond holdings, and both had experienced ‘bank runs’.
    - FCLIC’s run followed regulators’ televised comments that its poor condition necessitated a substantial cash infusion.
  - 2008 Financial Crisis -
    - 2008 0917 - Time Magazine - AIG Bailout Spooks Customers Around the World - [link]
    - 2021 - YPFS Lessons Learned Oral History Project: An Interview with Eric Dinallo, New York State Superintendent of Insurance during the 2008 Financial Crisis - 19p
      - (p17-18) - [with Tim Geithner, President of the Federal Reserve Bank of New York -
      - Eric Dinallo: Geithner asked about, because they're seriously considering, giving serious thought about a debtor in possession—DIP—thing for AIG.
        
        He's like, "What do you think?"
        
        I'm like, "It's a horrible idea."
        
        He said, "Why?
      - I said, "Because while it looks possible on paper, and I get the point.,,
        
        If you file for bankruptcy at the holding company level, all these subsidiaries, they're going to start ... Some states may even require by law … that the states will seize the operating companies, because the holding company filed for bankruptcy.
        
        They're going to pull up the drawbridge, and go into castle mode.
        
        Then you're going to have a run on insurance companies."
      - While I'm saying this, I swear to God, CNN is on. We took a break, and CNN was on.
        
        They were lining up in Singapore for, I don't know why, but at AIG's insurance company in Singapore, they were lining up.
        
        They were acting like a run-on-the-bank moment.
        
        Probably to check on their insurance policy.
Interest Rates
Rumors
- 1992 - SOA - Is There Life After Executive Life? Retirement Plan Participants and the Guarantees of Insurance Companies, Society of Actuaries - 22p
  - One problem with this approach is that the public is fickle.
  - There are rumors, concerns, higher interest rates, and rising stock markets.
  - They don't draw our money away gradually, they draw it away in big hunks.
    - That's what brought Continental Bank down.
    - That's what drove Executive Life down.
  - Once large numbers of policyholders perceive a problem, they begin yanking their money.
  - The life insurance company has typically invested this in long-term investments.
    - Depending on interest rates when the rumor occurs, or when capital flight occurs, this can cause the assets to be insufficient.
  - I believe that the life insurance industry faces major potential failures because of its change in emphasis on what it is selling.
    - When I was taking actuarial exams, the product that was being sold was the guarantee about human mortality.
    - That was what we sold then, and now we're selling investments.
      - We're selling universal life, and we're selling GICs.
      - These have very little to do with what we originally started from, and what the industry built on.
2017 0328 - GOV (House) - The Arbitrary and Inconsistent Non-Bank SIFI Designation Process, Ann Wagner (R-MO) --- [BonkNote] --- [PDF-83p, VIDEO-YouTube]
- (p66) - ACLI - American Council of Life Insurers statement - FSOC's reliance on an inappropriate and unrealistic bank-like "run" scenario on insurance products as the trigger of an insurer's financial distress or cause of systemic risk illustrates its bank-centric mindset for considering insurance firm designations.

» Have there been Runs in Life Insurance Companies ever?

No
(p29) - Dennis ROSS (R-FL). ...has there ever been a run on an insurance company in the history of the United States?
Douglas HOLTZ-EAKIN (President, American Action Forum)
- No. One of the mysteries of this designation has been ignoring the history of successful regulation of insurance companies...

2017 0328 - GOV (House) - The Arbitrary and Inconsistent Non-Bank SIFI Designation Process, Ann Wagner (R-MO), Committee on Financial Services - Subcommitte on Oversight and Investigation --- [BonkNote]

» Are Runs in the Future Possible / Likely?

Yes, Run in the Future are Possible / Likely.

» What could Trigger Policyholder Runs on Life Insurance Companies?

I believe that the life insurance industry faces major potential failures because of its change in emphasis on what it is selling. -- James Kenney

1992 - SOA - Is there Life After Executive Life? Retirement Plan Participants and the Guarantees of Insurance Companies, Society of Actuaries - 22p

2014 0204 - GOV (House) -The Federal Insurance Office’s Report on Modernizing - PDF-214p
2015 1208 - GOV (House) - Oversight of the Financial Stability Oversight Council - PDF-146p
2017 0328 - GOV (House) - The Arbitrary and Inconsistent Non-Bank SIFI Designation Process - PDF-83p

2014 12 - MetLife/Woodall/Hamm - Views of the Council’s Independent Member Having Insurance Expertise - 13p
- View of Adam Hamm, the State Insurance Commissioner Representative
- (p10) - 4. A key consideration for the final designation is the asset liquidation channel.
  - The final Basis, like the proposed Basis, continues to offer merely speculative outcomes related to the liquidation of assets based in large part on hypothetical and highly implausible claims of significant policyholder surrenders.
- (p11) - Even assuming the Council’s asset liquidation analysis was appropriate otherwise, it does not take into account the impact of regulatory intervention as described above.
  - This is exacerbated by the Council’s failure to appreciate the historical effectiveness of the insurance regulatory system in crisis.
  - For example, in response to the arguments by MetLife seeking to analogize the impacts of a failure of MetLife to other insurance company failures in history, the Council notes correctly that the failure of an insurance company of MetLife’s size and scope has never taken place.
  - While that is a fair statement as each company has its own unique characteristics, the fact that there is no comparable insurance failure is a testament to the state insurance regulatory system, a fact that the Council ignores.

2014 0204 - GOV (House) - The Federal Insurance Office’s Report on Modernizing Insurance Regulation - [PDF-277p, VIDEO-YouTube]
- (p12) - Tom Leonardi, NAIC, Connecticut Insurance Commissioner): It is based on an assumption of a banking model where there could be a run on the bank and Prudential might have to sell a trillion dollars of assets the next day.
- And that is just—with one very rare exception—not a likely scenario on which to base a systemic designation.
  - [Bonk: What is the Exception is he referring to?]

2015 1208 - GOV (House) - Oversight of the Financial Stability Oversight Council - [PDF-146p, VIDEO-YouTube]
- Dennis Ross (R-FL). There hasn’t been a run on life insurance, has there?
- Are people all of a sudden going to go and cash in their life insurance policies?
  - Because if they are, then our serious consequences for economic structure are way out of line. [Bonk-???> (p47)