31 October, 2008

The Riddle of insurers’ solvency

INSURERS are following a plot with an ending that may seem grimly inevitable. Their shares have sunk on worries that losses on their investments will leave them insolvent.In the Netherlands both ING and Aegon have received capital injections from the government. America’s life-insurance companies, a couple of which have already raised capital, are lobbying to be included in the Treasury’s $250 billion programme to purchase stakes in financial firms.

Are insurers really the new banks? Like lenders, insurers’ assets include shares and securities that have tumbled in value. But on the other side of the balance-sheet the comparison becomes laboured. Unlike banks, which rely heavily on debt funding, insurers’ main liabilities are the claims they will pay their customers—for life firms these stretch over many years. Whereas the depositors and lenders who provide funds to banks can jump ship overnight, insurance customers find it hard and expensive to wriggle out of their contracts.A run on an insurance company is thus hard to imagine. In theory that means capital adequacy can be reviewed at a dignified pace. But the industry has failed to create any measure of solvency that is accessible to outside investors. Insurance subsidiaries in individual countries and American states are regulated separately, often using different rules on, for example, mark-to-market accounting. European holding companies do have a single, numerically expressed, standard, called the insurance groups directive (IGD). Virtually all big companies still pass this, but most argue that it is too primitive to be useful.The problem for investors is the sheer opacity of insurance solvency models. In today’s markets, “trust me” just doesn’t cut it.