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With the savings and loan crisis and the problems of the banking industry fresh in its mind, the Congress has focused its attention in recent years on the financial problems in the insurance industry. The House Banking Committee requested that the Congressional Budget Office (CBO) examine what would happen to the economy in general and the financial system in particular if the insurance industry experienced a solvency crisis. This study addresses those issues.

Kim J. Kowalewski and Angelo Mascaro of CBO's Macroeconomic Analysis Division prepared the study under the supervision of Robert A. Dennis. CBO would like to thank Robert E. Litan for providing comments on an early draft of the study. A number of CBO analysts provided helpful comments, including Mark Booth, Douglas R. Hamilton, Joyce Manchester, Elliot Schwartz, and particularly Ronald Feldman. Karim Abdel-Motaal, Bill Singha, and Patrica Wahl provided research assistance.

The study also benefited from the assistance of many people outside CBO. Philip F. Bartholomew, Thomas G. Goddard, Frederick Ribe, and David B. Simmons made helpful comments. Carl J. Austin, Alison Cooley, and Lee Shiner of A.M. Best and Suzanne Stemnock of the American Council of Life Insurance provided data on the insurance industry. Dale F. Stephenson and Candy Miller of the National Conference of Insurance Guaranty Funds and Dana Cannon, Lisa Meyer, and Paul Peterson of the National Organization of Life and Health Insurance Guaranty Associations furnished data and background information on the guaranty funds.

The manuscript was edited by Paul L. Houts. Christian Spoor provided editorial assistance. Linda Lewis, Dorothy Kornegay, and Rae Roy produced the numerous drafts. Martina Wojak-Piotrow prepared the study for publication.
 

Robert D. Reischauer
Director
April 1994
 
 

SUMMARY

ONE - INTRODUCTION

• Solvency Problems in the Insurance Industry
• What Would a Solvency Crisis in the Insurance Industry Look Like?
• How the Insurance Industry Affects Economic Activity
• Conclusion

TWO - HOW A SOLVENCY CRISIS COULD ARISE IN THE INSURANCE INDUSTRY

• Catastrophic Increases in Claims by Policyholders
• A Collapse of Markets for Assets Held by the Insurance Industry
• Runs on Life Insurers
• The Underwriting Cycle in the Property and Casualty Industry
• Regulatory Efforts to Hold Down Insurance Premiums
• Inadequate Solvency Regulation
• Conclusion

THREE - THE EFFECTS OF A SOLVENCY CRISIS ON THE ECONOMY

• The Economic Impacts of a Higher Price of Insurance
• The Economic Impacts of Shifting the Burden of Unreimbursed Losses
• The Economic Impacts of Interrupting the Flow of Funds in Financial Markets
• Conclusion

FOUR - OPTIONS FOR REDUCING THE RISKS OF A SOLVENCY CRISIS IN THE INSURANCE INDUSTRY

• Options for Improving Solvency Regulation and Strengthening the Guaranty Funds
• Options for Limiting Solvency Problems Arising from Natural Catastrophes
• Options for Limiting Solvency Problems Arising from Runs on Life Insurers
• Conclusion

This document is available in its entirety in PDF.