Disability insurance observer: balance
By Allison Bell
John Hele, the chief financial officer at MetLife Inc. (NYSE:MET), went to a KPMG insurance conference yesterday and made a little news.
He pointed out that, if financial regulators treat MetLife as if it's really just a bank, as they seem inclined to do, and they apply the Basel III bank capital standards to MetLife, that could give the company an incentive to shorten its assets, according to Bloomberg.
Bank regulators tend to look at whether banks have enough capital to handle their liabilities now, because nervous bank customers can simply run to the bank to ask for their money bank.
Insurers with long-term liabilities -- long-term disability insurance policies, long-term care insurance policies and annuities -- have much less need to worry about runs. For them, what generally matters is their ability to match the duration of assets with the expected timing of their liabilities, to make sure they have the right amount of cash at the right time to meet policy or annuity contract obligations.
If you think about it, the bank regulators' rush to get insurers to shorten their time horizons reflects the same kind of short-term thinking that leads Congress to think in three-month shut-down-the-country budget cycles, and the Federal Reserve Board to run monetary policy in a way that favors McMansion builders that con spendthrift grasshoppers into buying cardboard houses today over insurers that encourage thrifty ants to save for misfortunes that might occur decades in the future.
(And, I know: The role of the Fed in setting the interest rates that matter is complicated, and there are some who say the real cause of rock-bottom interest rates is weak demand for loans. But, I think it's fair to say the Fed isn't doing anything much to increase insurers' general account yields.)
The bottom line under the bottom line is that policymakers seem to be operating under the assumption that Al Qaeda, global warming, tsunamis, Democrats, space aliens, or Democratic space aliens who heat up our climate and cause tsunamis to train with Al Qaeda are going to destroy us in about a month or two, and that we ought to maximize our utility during the remaining two months of existence rather than worrying about what we'll live on five months from now.
I have a lot of that kind of thinking in my own bones. I have three (or four?) flashlights on my keychain. I generally carry a backpack, rather than a purse, because I always try to have spare batteries, an AM/FM radio and chewing gum handy. Just in case. I try to go out for lunch every day and look up at the pretty moldings on the buildings in case someday the buildings aren't there any more.
But there has to be a balance between a little healthy paranoia and trying to hide from any and all risk in a financial bomb shelter.
If we always minimize all risk, if we spend all of our time enjoying ourselves as well as we can in our bomb shelters, where we try to earn a living by borrowing money at one low rate from a quasi commercial company backed by a government-sponsored enterprise and lending the same money to another government-sponsored enterprise, how do we generate any meaningful economic activity?
We avoid the risk of something bad happening by embracing the risk of doing nothing worth doing.
The bottom line under the bottom line under the bottom line is that turning a company like MetLife into a company that has an investment time horizon of about two hours is a terrible idea. Nothing good can come of it.
Originally published on LifeHealthPro.com