A Post-Mortem of the Life Insurance Industry's Bid for Capital During the Financial Crisis

Abstract

In this paper, we show that life insurance companies were under significant capital strain during the recent financial crisis. This was the case not just for the notable case of American International Group (AIG), or for life insurers within the largest life insurance groups that applied for government funds, but for life insurers across the entire industry. The ability to access government funds, the benefit of regulatory actions and the large internal capital transfers received by life insurers from their non-insurance parents during the crisis combined to contribute significant amounts of reported statutory capital to life insurance companies. Moreover, capital contributions to life insurers from their parents are not limited to crisis periods; they also exhibit a business cycle pattern. This study provides evidence suggesting two important policy recommendations and calls for additional research on these issues: 1) insurance supervisors should have the ability to assess capital adequacy and availability beyond the level of the insurance operating company, including the ability to assess the capital adequacy of, and availability of capital from, holding companies not currently supervised by state insurance regulators, and these supervisors should take a consolidated view in monitoring the size, type and direction of internal capital transfers when evaluating the viability of entity-level life insurers; and 2) life insurance supervisors would benefit from staff with expertise in understanding and forecasting the impact of macroeconomic and financial conditions on life insurers’ balance sheets.