The insurance business is supposed to be simple and relatively stable. It's not difficult to sell insurance, collect premiums, hedge your risk elsewhere with re-insurers and then invest the remaining premiums conservatively.
So what the hell happened? AIG (NYSE:AIG) allowed an unhedged fund to operate from within and a tiny 400 person division brought down a giant that employed 125,000. Hartford (NYSE:HIG), Prudential (NYSE:PRU), Lincoln National (NYSE:LNC), MetLife (NYSE:MET) and Genworth (NYSE:GNW) are all suffering the same fate. All are facing ratings agency downgrades based on capital ratios that fall with the stock market.
The culprit in this mess are guaranteed variable annuity contracts. A relatively new phenomenom in the annuity business, guarantees on annuity returns are irresponsible and should never have been allowed to exist. I don't remember which insurance company first got the bright idea to offer a minimum guaranteed return for their investors, but once launched by 1, the other firms soon followed with similar guarantees.
Insurance regulators whistled by the graveyard and made no effort to stop or even slow down the proliferation of these contracts and the rest is history. Sure, there were no evident problems during the bull market of the past 13 years, but once markets began correcting it was simply a matter of time until these guarantees began to destroy capital cushions at all of the above firms.
Big deal, you say. Let these insurers go belly-up if they can't raise new capital. One small problem. Millions of Americans have their retirement savings in annuities and millions more have life insurance policies with the above firms. Our fragile system could not withstand a large run by policy holders to cash out their life insurance policies, as these companies operate like banks and only keep a small percentage of assets in liquid form.
So to prevent disaster, you will soon be asked to give half a trillion or so of borrowed money in order to save these life insurers all because of their goddamned guarantees on variable annuity returns. They won't ask for $500 billion all at once, because the sheeple might actually notice and complain. Instead we'll wake one morning soon to hear that Treasury has given $100 billion to the industry and that the problem is now solved.
Does the pattern sound familiar? It should. The government assault on taxpayers to rescue big business is always incremental. Drip, drip, drip until we drown.