Insurance: Another Shoe Drops
By - April 13, 2009

There is no doubt that the bank bailout was mismanaged. Now it's time to buckle up for a government run on the insurance industry. That's the signal the White House is sending by nominating Neal S. Wolin, a former senior executive with the Hartford Financial Services Group Inc., as deputy secretary of the Treasury. The department already has the power to take over stakes in life-insurance companies through the Troubled Assets Relief Program (TARP) but has yet to do so. With Mr. Wolin coming aboard, it appears that the Obama administration is putting the team in place to expand government's control of private companies one step further. – Washington Times

Dominant Social Theme: Inevitable next step.

Free-Market Analysis: We've been waiting a while. American insurance companies, like European ones, are heavily invested in a variety of instruments that are more or less shaky. In fact, it stands to reason that they have adopted the same kind of investment behavior and purchased the same kind of leveraged products that has rocked American banks. And given the Obama administration's predilection for seeking control over the country's financial sector, it is not surprising that insurance is next on the agenda.

What is slightly more surprising is the relish with which the insurance industry seems to be waiting its turn, or participating already. This is an industry that has avoided federal regulation at all costs, seeking to strengthen its state ties out of the belief that state regulation is a good deal less onerous than a federal hook-up. But how can we explain this, also in the same article, excerpted above:

While many large life insurers, such as New York Life Insurance Co., MassMutual and Northwestern Mutual Life, continue to manage their core insurance lines successfully, others such as the Hartford and Genworth Financial Inc. rushed to buy regulated savings and loans just so they could call themselves banks and qualify for government TARP funds.

Perhaps at some point a level of regret will slip in, but you know the insurance industry is not what it once was, any more than GM is. What chiefly comes to mind is the lavish use of the word "guaranteed" in conjunction with various American annuities and insurance products. The "guarantee" mostly means that the insurance company itself stands ready to make good on any losses if investments sink below a certain point. But does anyone in this modern age truly believe that such a situation cannot happen, or that states will step in to make up the difference? The reason for the enthusiasm for the TARP bailout may have to do significantly with a willingness to involve the federal government before any such "guarantees" come due.

After Thoughts

The state of the American insurance industry, which was once a wonder of the world, is symptomatic of how countries and their public venues cannot be just a little bit socialist — and how the dissolution of moral hazard ends up costing taxpayers. Socialism appears innocent enough in its preliminary stages. But then one day you wake up with your entire financial system federalized and nowhere to go. F.A. Hayek was right.

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