Financial innovation and standards for the capital of insurance companies
AbstractSince their inception, insurance companies, banks, and other financial institutions have played prominent roles in our capital markets. These intermediaries have fostered saving and investment by issuing liabilities that appeal to savers in order to purchase the obligations of investors on attractive terms. Among financial intermediaries, life insurance companies traditionally have distinguished themselves by attracting long-term savings and by providing long-term financing for investment in real estate and durable equipment by businesses.> This article reviews the distinctive features of life insurance companies and how they have reshaped their liabilities and restructured their assets in order to cope with the consequences of rising interest rates and increasing competition for savings during the past three decades. The author analyzes the consequences of these financial innovations for the capital of the industry as well as the distribution of capital among life companies, and goes on to examine the issues relevant for measuring and controlling the capital of life companies. He concludes that prudent standards for capital should take into account an insurance company's entire balance sheet, not just its holdings of risky assets. Marking only risky assets according to their disposal values, while reporting other assets and liabilities according to other rules, can greatly misstate the financial condition of life insurance companies. And to the degree that financial intermediaries increasingly favor more familiar assets, the role of nonfinancial corporations as financial intermediaries will continue to expand.
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Bibliographic InfoArticle provided by Federal Reserve Bank of Boston in its journal New England Economic Review.
Volume (Year): (1995)
Issue (Month): Jan ()
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- W. Scott Frame & Lawrence J. White, 2002.
"Empirical studies of financial innovation: lots of talk, little action?,"
2002-12, Federal Reserve Bank of Atlanta.
- W. Scott Frame & Lawrence J. White, 2004. "Empirical Studies of Financial Innovation: Lots of Talk, Little Action?," Journal of Economic Literature, American Economic Association, vol. 42(1), pages 116-144, March.
- W. Scott Frame & Lawrence White, 2002. "Empirical Studies of Financial Innovation: Lots of Talk, Little Action?," Working Papers 02-18, New York University, Leonard N. Stern School of Business, Department of Economics.
- Lawrence J. White, . "Technological Change, Financial Innovation, and Financial Regulation: The Challenges for Public Policy," Center for Financial Institutions Working Papers 97-33, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Ralph C. Kimball, 1997. "Specialization, risk, and capital in banking," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 51-73.
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