The Insurance Industry Doesn't Need Subsidies

By Evan G. Greenberg
The Wall Street Journal (Opinion)
October 31, 2008


The Treasury Department reached out to insurance companies last week to gauge our interest in participating in its Capital Purchase Program (CPP) -- where the government provides capital to distressed companies in the form of equity stakes. The majority of property-casualty insurers said "no thanks" via their trade association, the American Insurance Association. As the CEO of one of those insurers, I'd like to explain why this idea is bad for the insurance industry and the country.

While my company supported creation of the rescue plan for deposit-taking institutions, and perhaps investment banks, the insurance industry doesn't need the program and doesn't belong in it. The CPP should only assist companies that pose systemic risk to the financial system resulting from counterparty failure, or a major liquidity crisis in the credit markets.

There is no evidence that insurers inhibit the availability of credit, or possess counterparty credit exposure, that threatens the financial system. Yes, insurers have been buffeted by the current financial market turmoil. But this is not a crisis, nor does it threaten a "run on the bank." Insurers are not generally lenders, and the availability of credit is not meaningfully affected by insurers' financial issues. Nor will delivering capital to insurers unfreeze any credit markets.

In addition, the risks of the current credit crisis to our policyholders are minimal. Ours is a highly regulated industry, and policyholders are protected in all 50 states by priority rules, capitalization requirements and state-managed guaranty funds. Nothing today jeopardizes those strong safeguards.

Some have argued that the life insurance segment of our industry needs the CPP. Some life insurers may want it -- but none of them needs it.

Although some life insurers might one day face a challenge liquidating assets to meet their obligations, this could be addressed using the asset-sale function of the Troubled Asset Relief Program, or the facilities being run by the Fed. Neither of these programs involves government investment in the equity of our industry. The exchange of assets for cash is the proper remedy for individual liquidity problems. It is unnecessary to inject capital through government ownership of insurance companies, life or property-casualty.

Treasury's standards for the CPP recognize the risks inherent in governmental capitalization and ownership of private enterprise -- particularly its anticompetitive effects. The insurance industry has historically been one of the most competitive, and a major point of that competition is accessing private capital through navigation of market forces.

The infusion of taxpayer capital into insurers -- especially at far-below-market rates -- would disrupt the normal market forces that separate strong insurers from weak ones, subsidizing weaker players by eliminating their need to go to the market for capital at market-efficient prices. Even in the current environment, private capital is available to insurers at market prices -- the capital is just more expensive than taxpayer money. In the absence of a broken market and a public crisis, we should reward those companies that make prudent decisions and not subsidize those that do not.

If taxpayer capital were made available, perfectly healthy insurers might feel compelled to participate in a dramatically discounted alternative to the capital markets, just to compete with the companies that do. Such behavior would turn the CPP on its head, making it a general government capital subsidy rather than a means of crisis correction.

Worse, such cheap capital would likely be used by healthy insurers to fuel "consolidation," i.e., a program of buying up other companies. This is obviously not the purpose for which Congress authorized the CPP. We owe it to taxpayers to assure that their capital should only be a last resort, and that it should never be cheap.

Insurers have rowed their own boats for centuries. CPP capital should be deployed elsewhere to curtail a crisis, not as a prop for weaker insurers.

Mr. Greenberg is chairman and CEO of ACE Limited. He also serves as chairman of the American Insurance Association.


Copyright © 2008 FBIC (www.badfaithinsurance.org)



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