In the most developed countries, where precariousness has become politically untenable, everyone wants to be protected against risks: citizens against the risks of sickness and aging, businesses against economic risks. Protection systems, both public and private, have been put into place. Especially insurance companies.
In order to insure that they are able to cover the damages they claim to insure, these companies have a nest egg they put money into, for everyone’s wellbeing. As with banks, this nest egg must follow certain rules, known as Solvency I, which verify that the insurance companies will, when the time comes, have the means to deal with the risks they are covering and according to the new rules, that they will have almost zero probability (0.5%) of going bankrupt in a year.
Specifically they must publish a “solvency margin” every six months, a proportion between life insurance commitments (their debt towards savers) and the credit built up to deal with damage insurance commitments (their debt towards economic agents), and their amount of capital.
This capital stock is the total amount of equity in the insurance company, its subordinated debt and a valuation of profits that the company could generate with its investments. So these investments are not valued according to their immediate market value but according to a long-term valuation generally calculated using mathematical models.
All of this yields very uncertain valuations: first of all because it presumes that the law of big numbers is in play and that a buyer always finds a seller, which has turned out to be false for banks. Then because the insurers, victims of exceptionally low interest rates, promising very high yields to their clients, have invested a significant part of their reserves in high-risk products and even in CDS, a special kind of insurance policy, concealed beneath hedge funds or structured bonds, and even in commodities derived from these credit default swaps. Lastly because with the crisis, certain investments considered very secure – like bonds from banking institutions – have become devalued to a trivial amount by the risk of nationalization.
Altogether, the solvency ratios of insurers have become very fragile. The insurance sector is not globally regulated; the International Association of Insurance Supervisors (IAIS), which aggregates all insurance regulators, does not even publish statistics. So we cannot help but venture a guess on valuations: it seems insurance companies have approximately $25,000 billion ($25 trillion) in commitments (about 80% for life insurance and the rest for damage insurance) against one-to-one, only $5 trillion for capital stock.
That’s very little. Too little: a major natural disaster, a series of bank failures or nationalizations would set off the failure of insurers, which would be even less tolerable than that of the banks. The people who are saving up (among them retirees) would lose their assets; businesses would no longer be able to find people to share the risks with; household businesses would lose a source of funding at least as important as banks.
In other words, the nationalization of banks hastens those of insurance companies. To mask this reality by changing the rules of accounting will only delay the expiration date. All of this, naturally, the G20 will not mention.