It may surprise some to know that the global financial crisis of 2008 was not the first time the expression "too big to fail" was used. The phrase has, however, become synonymous with the collapse of Lehman Brothers, the near collapse of American International Group Inc. and the near implosion of the stock market. So much so, in fact, that insurance companies and financial institutions will do just about anything not to be labeled as too big to fail.
Too big to fail is not meant as a compliment, especially these days. The expression refers to businesses that are so large and so interconnected with other companies and the government that their failure would send a shockwave through the entire economy.
That is one of the reasons the International Association of Insurance Supervisors has been developing a list of criteria that would identify insurance companies that are too big to fail. At the same time, a committee of financial regulators from the G20 group of nations is developing safeguards that regulators could impose on institutions that meet the criteria. The idea is that regulators -- and the rest of us -- will not be blindsided again by a company's collapse, nor will the taxpayers have to bail that company out.
The IAIS recently released its proposed list of warning signs, and an international insurance think-tank (and lobbying group) is not pleased. The criteria are too onerous, the organization says, and the IAIS has failed to recognize that big is not necessarily bad. These companies manage their risk by diversifying their markets and their operations, and more is better in the insurance business.
Apparently, what regulators see as indicators of systemic risk, insurance companies see as "indicators of stability and strength," according to an organization official. We'll get into what those indicators are in our next post.
Source: Reuters, "Insurers seek softening of 'too big to fail' criteria," July 31, 2012