The recent collapse of Silicon Valley Bank and Signature Bank has raised concern about the stability of the world’s financial system. People understandably want a safe place to put their money. Annuities and life insurance policies also offer a place to store your assets, but are they more secure?
Investigations into the events surrounding SVB’s recent failure revealed bank runs can happen fast. SVB disregarded multiple formal warnings from regulators known as “MRA” warnings, or “matters requiring attention.” These warnings are confidential (meaning we don’t know how many other banks have also received them) and banks can legally ignore them, as SVB did.
While mismanagement is undoubtedly one of the reasons SVB collapsed, it is larger challenges affecting the world economy that is creating pressure on banks and raising the prospect of further failures. Kristalina Georgieva, who serves as managing director of the the Washington DC-based International Monetary Fund (IMF) stated:
“At a time of higher debt levels, the rapid transition from a prolonged period of low interest rates to much higher rates – necessary to fight inflation – inevitably generates stresses and vulnerabilities, as evidenced by recent developments in the banking sector in some advanced economies”
Even before the collapse of SVB, a majority of economists predicted an imminent recession, and the banking crisis is likely to only make the downturn worse.
Insurance products such as annuities and indexed universal life insurance (IUL) offer families retirement income, asset protection and accumulation. These options are backed by insurance companies, not banks, and are increasingly popular. In fact, general economic instability and high interest rates spurred annuity sales to hit record levels last year.
Although insurance companies are financial institutions they are not exposed to the same risks as banks.
The simplicity of it is that broadly speaking, insurance policies exist to make you whole if something bad happens to you unexpectedly. You aren’t going to die or set your house on fire just to cash out an insurance policy (and this isn’t allowed in any event).
While a bank run can happen simply because people are feeling panicky, insurance companies require specific events to occur to trigger an insurance claim. These insurable events themselves (such as deaths, car crashes, floods, fires etc) can be predicted accurately through actuaries’ application of what is known as “the law of large numbers,” a statistical principle first discovered by Italian mathematician Gerolamo Cardano in the Renaissance era.
It’s important to note that just as bad management is associated with bank failures, any company, including an insurance company, can be mismanaged, and can fail. That’s why although insurance companies have some inherent advantages over banks, it’s important to examine the company’s fundamentals before you make a decision about your money.
A good resource to check is AM Best, which is a global credit agency that rates insurance companies’ stability. Its ratings, which it expresses as letter grades from A++ to F, are publicly available to anyone.
Eric Eisenhammer
Eric is an Asset Protection Specialist. He is co-founder of Legacy Defender Insurance Solutions and holds licenses in Life and Property & Casualty insurance. Eric earned a bachelor's in Finance from California State University, Northridge and a Master's in Public Policy and Administration from Sacramento State.
