Historically, life insurance companies have served as shock absorbers during times of economic stress. In a crisis, some financial institutions such as banks are forced to sell into a dropping market to meet a sudden surge in demand from panicked customers who want access to their cash. But the life insurance doesn’t have the same kind of vulnerability. Life insurance companies have long term relationships with their customer and a long-term outlook on investing.
That’s why MetLife continues to be concerned about proposals by global regulators that would make life insurers more vulnerable – not less – during times of broad economic anxiety. A proposal by the International Association of Insurance Supervisors (IAIS) would require insurance companies to view their assets based on their raw market value which is pegged to the ups and downs of the stock market. At the same time, the IAIS would require life insurance companies to hold higher levels of capital. These two changes could create chaos during a financial crisis as broad classes of assets suddenly drop in value. In short, the proposal by IAIS known as the Basic Capital Requirement, (BCR) could force life insurers to sell into a panicked market when there is no real need to raise money.
The BCR stands in contrast to regulatory approaches that are already in place in the U.S. and Europe. In the U.S., life insurance companies are based on the book value of its assets, which allows for longer, more resilient view during volatile economic times. In Europe, a regime known as Solvency II takes a mark to market approach but has sophisticated approach to valuing assets that includes taking into account hedging and risk management. While neither the U.S. or the European systems are perfect, they are workable and don’t amplify the effects of an unstable market.
A recent study by Oliver Wyman showed that if the BCR were in place during the 2008 crisis, life insurers would have been forced to sell assets as their assets dropped in value. In contrast, life insurers were able to weather the financial crisis with patience and see their investments restore their value with no harm to their customers.
The good news is that international regulators have come to recognize some of the BCR’s inherent flaws and are working remedies. One thing that IAIS needs is more time to study the issue. The U.S. regulatory regime was developed over decades and the Solvency II used in Europe has been in the making for 15 years.