Beware the banks
Insurance has had a raw deal of late. Banking is the simplest business in the world: pay depositors at 5 percent, charge borrowers 8, and spend the rest of the day playing golf. In the past few years, however, many bankers have abandoned the principles that had seen them safely through thousands of years. They opted ﬁrst to lend to anyone without caution or inquiry and now, not to lend to anyone, in order to avoid making the same mistake twice. The result has been a frightening economic meltdown from which most of us are only now starting to recover.
The authorities who failed to monitor banking activities reacted to these adverse conditions by slamming stable doors wherever they could be found. One such door that regulators have been trying to close is marked ‘insurance’. It matters not a jot that insurance and reinsurance have been studiously improving their controls and processes for years, nor that the buyers of insurance suffered little as the world fell apart.
The situation at AIG (which was only incidentally an insurance company) was used to justify all kinds of attacks on the insurance sector, even though AIG did not fail: it had a cash ﬂow problem caused by bankers’ incompetence. In those days, who among us didn’t have the same problem?
The old AIG—like many businesses only more so—was built on the assumption that the world’s banks were going concerns, ie, would behave sensibly and remain in business. When neither of those suppositions proved valid and the credit windows closed, AIG was left impossibly short of cash. The US government, keen to show (albeit much too late) that it had teeth, offered AIG cash. In return, Uncle Sam demanded most of AIG’s stock. This gross over-reaction was decided in panic and executed to deﬂect criticism of regulators who were napping at the wheel.
Insurance survived it all, only to face incompetence on an unimaginable level from the European authorities. They proposed a new level of regulation for insurers in their domain, announcing the date of its implementation well before announcing what the legislation would be. We still don’t know what it will be (other than a pain in the neck). The latest estimated date for its introduction is 2016. The basic idea of Solvency II, of course, is to ensure that what didn’t happen last time won’t happen next time.
Now comes the assault by the capital markets on reinsurance. Sidecars, cat bonds, insurance-linked securities—all are an attempt by the capital markets to cream off the best of the reinsurance business in the name of spreading their risk. The ﬁnanciers have persuaded themselves that insurance is not correlated to other investments, in the same way, presumably, that they believe one’s elbow is not connected to one’s plumbing.
Like the ﬁnancially prudent, who are being caned to make good the losses suffered by the imprudent, so insurance is being punished for the sins of others. Is this any way to run an ant farm?