AIG is ringing the alarm bell the loudest.<\/p>\n
Ben Bernanke and Tim Geithner think they’re bring clever and saving the US budget by forcing interest rates extremely low.<\/p>\n
I’ve been cautioning people not to rush into insurance products as a “safe haven”. The problem insurance companies face is that their existing insurance policies are based on certain assumptions about long term interest rates and reasonable returns to expect on long term investments like office buildings, shopping centers, aircraft leases and the like.<\/p>\n
Because it can be 30 or more years between when an insurance company takes in money and when it will have to return the money, an insurance company can hide its funding problems for a long time – but with 30 year US Bonds now down to 3.22%, the insurance companies are going to have severe solvency problems when\/if state regulators start asking hard questions. Stare Guaranty funds that partially back insurance products are little more than a charade.<\/p>\n
There are lots of really unpleasant side effects when an insurance company is declared insolvent. If you have borrowed against your policy higher than the amount guaranteed by the state fund, you will have to pay back the excess amount of that “loan” you expected to only pay back after you were dead. If the company is liquidated and your policy terminated early, the amount of the gain on the policy above what you paid in becomes a taxable event, even if you never receive that money from the liquidation. Since insurance invests in very long term assets, it can take 5 or 10 years to unwind the assets of an insurance company and send a final check.<\/p>\n
All of the above may be why in 2008 the government stepped in to prevent the failure of AIG, although it had no obligation to do so.<\/p>\n","protected":false},"excerpt":{"rendered":"
AIG is ringing the alarm bell the loudest. Ben Bernanke and Tim Geithner think they’re bring clever and saving the US budget by forcing interest rates extremely low. I’ve been cautioning people not to rush into insurance products as a … Continue reading