There is no end to it, this process of bailing out financial institutions. Once the banks were stable, the rest of the sector was supposed to become more solid. That has not worked. Banks are not yet stable, and the life insurance industry is now stepping forward asking for relief from its plight to become part of the Great Rescue of 2009.
According to The Wall Street Journal, “The Treasury Department has decided to extend bailout funds to a number of struggling life-insurance companies, helping an industry that is a lynchpin of the U.S. financial system.” No one seems to have been able to put an accurate price tag on this part of the government’s assistance program, but, given the size of firms like Met Life (MET) and Prudential (PRU) the numbers are bound to be large and could wipe out what is left of the TARP funds.
The value of stocks and bonds that the insurers hold has dropped as the market has deteriorated. That makes it harder for the companies to pay out money due to their customers. At some point, their reserves begin to dwindle to dangerous levels. And, the falling value of their assets makes it harder for the insurer’s to raise capital.
Insurance companies provide many of their customers two important services. The first is payouts when a customer dies. The other is investments that customers hold for retirement and their personal net worths. Why should the government guarantee the value of either of these?
As the fortunes of banks continue to falter, common shareholders may see the value of their investment go to zero. Bondholders may also face significant losses. The government has no plans to help these groups, many of them individual investors. If they will not get assistance, why should the clients of life insurance firms? The argument the insurers make is that their customers are more like banks depositors than bank investors and therefore deserve similar consideration. That may be true for death benefits, but it is not for customers who have put money with insurance companies as investments. They take a risk not unlike a stockholder in a public company.
And, with the government running low on money, where does it say that anyone with a life insurance policy is absolutely guaranteed a payment to their beneficiaries when they die?
Douglas A. McIntyre