Insurers are a touchy bunch. MetLife, America’s largest insurer by assets, is so outraged at being labelled a “systemically important financial institution” (Sifi) that it may take the US government to court. Big banks are used to the designation, while insurers are relatively new to it. But is it really so strange to argue that an insurer with nearly $1tn of financial assets could be systemically important?
The Federal Reserve and US Treasury say that a run on a large insurer – for example a mass cash out of life policies – would disrupt the entire financial system. Insurers acting like banks is also a concern. AIG failed during the financial crisis because it insured bad mortgage-backed securities. The multibillion dollar taxpayer rescue that followed still resonates in the American psyche.
MetLife disagrees. Insurers’ standard argument is simple: we are not banks and AIG was an outlier. MetLife also argues that, unlike banks, it invests in long-term assets to match its long-term liabilities. It says a mass surrender of its policies is not possible as 60 per cent of its contracts cannot be shut over night. Many annuities and life policies can only be disbursed through regular payments, not all in one go. The remaining 40 per cent can be cashed out but only at hefty penalties. MetLife points out that during the crisis it did fairly well. Surrender rates were below 10 per cent (the industry average was low single-digits). Benjamin Lawsky, New York’s banking regulator, has come to MetLife’s defence. He says the insurer is properly supervised (by him, as it happens) and if it were to fail the resolution would be orderly.
Many of these arguments are fair and insurers should not be regulated like banks. But that does not absolve them from close scrutiny. Regulators should regulate for the next crisis, not the last one – that MetLife did well last time is irrelevant. The failure of any institution with $1tn in assets could do serious damage to the financial system. Met Life fully deserves its Sifi status.
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