Oliver Twist, More Please

So, another (we've got beyond just two, so it's hardly the 'other') shoe has dropped. Certain of the less competent life insurance companies are bellying up to the trough of corporate welfare. They've earned both barrels, so here we go.

Their approach to the core of what they do, keeping track of money, is a function which many of them farmed out. In the business of business is the idea of core competency; what you do as a business, what you do to create a difference between yourself and all the other businesses in your market. This is what you do yourself, because you figured out a smarter way to run the business. You never buy it off the shelf from the Grace L. Ferguson Storm Door and Insurance Software Company. You never do this because you are supposed to KNOW a better way to do whatever this business does. But, not these chuckleheads. Like lemmings, they follow someone down a rabbit hole. Okay, mixing some metaphors, but you get the idea.

These dinosaurs are more bureaucratic than government. I know, having worked for both the Commonwealth of Massachusetts and the Federal government and one of those companies which sold them old fashioned software.

So, now they are begging to be bailed out. Pity. When I was in grad school studying economics, I heard an old saw, which was: if you want a little bit of money you go to a bank, if you want a LOT of money you go to an insurance company. There have been rumblings in the jungle that commercial real estate is headed for as big, if not bigger, fall as residential. The insurance industry, since it was where you went if you needed a LOT of money, finances a lot of commercial real estate. There is little evidence that insurance companies were knee deep in the subprime debacle, so what is it that has them begging for money? It has to be that their assets are decaying. It could also be some combination of the following:
- folks who bought insurance are redeeming policies in order to get the cash, or just avoid the payments. Either way, the way insurance works, from the company's point of view, is to assume X years of payments in order pay the agents, management, and shareholders. So far as I know, X is not published. Whatever the number, if policyholders are exiting early, this causes a number of problems. First problem is cash flow drops. Second problem is investment income drops. Third problem is that some percentage of policies need to be paid back some percentage of earned income, from all that real estate investment.
- Alan Greenspan continues to plague them. Remember when Greenspan said that interest rates would be held low for as long as necessary? Some, I would wager an increasing number, are figuring out that he is patient zero. Insurance companies, more so than banks, are sensitive to long term interest rates, since this is where they live. As inflation drops, or doesn't rise, and interest rates stay historically low, insurance companies can no longer depend on the US Treasury for useful return. That ouroborus again. Or, you can't have your cake and eat it too.

Here's the delicate question. AIG, and similar, got in trouble by leveraging out of their minds. The collapse of such a structure, while bad, is A) expected and B) not systemic. I know, the term used by Geithner and the rest is "systemic risk", but this monumental leveraging was not systemic, in fact it was flaunting of the age old rules of financial activity. On the other hand, what the life insurance industry has to be facing, if it truly is in need of a bailout, is a systemic problem: the system of life insurance whereby premium payments are, by design and intent, insufficient to fund payouts to policyholders, agents, management, and shareholders. The insufficiency, of whatever magnitude, is by design and intent to be provided by investment income. Should interest rates remain below the value assumed by the actuaries, the fallout is no different from what social security faces. No money.

The difference between social security and life insurance, particularly annuities, is profit and overhead. This looks like yet another case of capitalists socializing costs and privatizing profits. Such a deal.