Economy & Budget

Life insurance: Security for America’s future

It was eight years ago this month that Congress approved a $700 billion emergency bailout of Wall Street.  The finger pointing hasn’t stopped since but one thing is clear, the 2008 financial crisis was not brought on by the insurance business which has gone on to prove itself, once again, a uniquely stable component of the financial sector.

The nature of life insurers’ business cycle, with its long-term promise to their customers, allows them to ride out broader financial panics without being forced to sell into a downward spiraling market. AIG’s failure was not related to its core insurance business but to a financial products division that got into shadow banking and subprime mortgages.

{mosads}Through its primary products — life insurance, annuities, and non-medical health products such as disability income insurance and long-term care insurance (LTCI) — the life insurance industry functions as a private provider of personal financial protection. It also directly drives economic growth by supporting capital markets and providing economic stability for consumers.

Life insurers have distinctly long view on investment, especially compared to banks;  96 percent of bonds held by life insurers have a maturity of five years or more, compared to just 28 percent for commercial banks.

Sixty percent of American households are covered by some form of life insurance, with total financial protection provided by life insurance policies of $20.1 trillion. The insurance industry allows millions of American households to reduce the risk of financial shock because a premature death, sickness or even retirement.

The percentage of households experiencing severe financial loss following the death of a primary earner is only 6 percent if the earner had life insurance. Without life insurance, that number increases to 33 percent, according to a 2003 study. Similarly, annuities, which can provide a guaranteed life time income stream, provide assurance that you won’t outlive your savings. This risk has become increasingly real as fewer Americans are covered by guaranteed pensions, lifespans rise, and  at least in recent years, fixed-income investments provide historically low real yields. The life insurance industry has paid out $774 billion in life, annuity and disability benefits over the past five years, equal to 20 percent of Social Security spending over the same period.

The life insurance sector also helps the economy in significant, and often-overlooked, ways.

The life insurance industry helps channel household savings into worthwhile investments. Recent research suggests that an increase of one percentage point in the ratio of life insurance premiums to GDP would increase the GDP growth rate by 0.15 percentage points — $26 billion.

At the core of the life insurance’s business model is the matching of long-term liabilities with long-term fixed-income assets. Approximately 90 percent of life insurers’ general account assets – nearly $4 trillion — are in fixed-income investments, and 95 percent of their bond investments have maturities greater than five years at time of purchase.  History shows that life insurers just don’t face the kind of crisis-driven risk of “runs” that banks may face during a panic, that was true in 2008, just as it was true during the Great Depression. Also unlike banks, life insurers are not subject to significant contagion risk during financial crises.

Life insurance may not be exciting but that’s the point. Its stable and long-lasting obligations to its customers and patient capital, allow it to play a unique role for the broader economy and families during times of economic stress.

Author Professor David Cummins is the Joseph E. Boettner Chair of Risk Management and Insurance at the Fox School of Business, Temple University. This op-ed is adapted from “The Social and Economic Contributions of the Life Insurance Industry,” published by the Brattle Group with support from MetLife, Inc.

The views expressed by authors are their own and not the views of The Hill.


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