In January, MetLife, the largest insurance company by assets, was deemed as systemically important, or “too big to fail,” by the Financial Stability Oversight Council. In other words, regulators believe MetLife is so big (over $902 billion in assets) and entwined with the financial system that it could threaten the economy if it collapsed similar to what we saw happen with AIG in 2008.
Being too big to fail means the company will be subject to stricter financial oversight similar to what the largest US banks are. As a result of the oversight, MetLife will be required to increase the amount of cash reserves held against losses, undergo regular inspections by federal examiners, and limit its use of borrowing money. It also means they will operate under the jurisdiction of the Federal Reserve.
MetLife believes this classification will increase its cost of conducting business putting it at a competitive disadvantage price-wise with competitors’ insurance products. They’d believe they’ll be forced to raise prices, lower the amount of risk they take on, or stop offering some of their products, which is why MetLife is challenging this decision.
I believe we should be asking whether or not insurance companies, let alone any company (including banks) should be too big to fail. The other companies on the “list” that aren’t banks include American International Group (AIG), GE Capital, and Prudential Financial. I have two concerns about MetLife, or any insurance company, being too big to fail.
Regulatory Confusion: Any insurance company that operates as an admitted carrier in a particular state operates according to the guidelines of that state’s insurance department. For companies conducting business in Texas, they are regulated by the Texas Department of Insurance or TDI, which sets forth minimum requirements for cash reserves, as well as, products and their pricing. Companies that fail to meet these guidelines cannot operate within the state, and if they are insolvent, claims are paid out of the state’s guaranty fund.
If Met is too big to fail, who is ultimately responsible for regulating them, the Federal Reserve, or state insurance departments such as TDI? Is the regulation limited to their financial health or will it extend to insurance products? If the regulation is limited to financial health, which agency has the final say so? If there are different levels of reserve requirements between the Federal Reserve and a state insurance agency, which one must the company follow? Will taxpayers be liable to pay claims through higher taxes if MetLife can’t, after all, who paid to bail out GM, Chrysler, or the banks?
Too Big to Fail: While MetLife and the government wrestle over this, I believe the central question is should any company be too big to fail? On one hand, the government’s concern with AIG, is that if they were allowed to fail, the financial impact could have resulted in the economy collapsing, bank failures, and a possible depression instead of a very deep recession.
That’s a valid point, however, are we not left with the same potential situation by providing protection to the very companies that operated so poorly in the run up to 2008? Does providing protection from failure only increase people’s willingness to make risky business decisions without worrying about being accountable to their shareholders and clients? Should a company that’s too big to fail be broken up to reduce its ability to pull the entire economy down by itself?
I don’t have the answers to the questions I’m asking. I do know as a small business owner, I make decisions each day which can impact the financial stability of my company, and that means I measure each decision before I make it. What do you think? If this were your decision, what would it be? Share your thoughts and questions with me on our Google +, Facebook, and LinkedIn pages. I’d love to hear from you!