Assessing the solvency of the insurance industry

The article attempts to assess the ability of the insurance industry to discharge its liabilities and to settle in full the claims against it without resorting to any of the limited safety nets that exist. The article examines several indicators of the health of the industry including: (1) industry profitability, (2) the risk level of assets held, (3) the industry's capital cushion, (4) the duration match between assets and liabilities, and (5) possible agency problems induced by the operation of a safety net. In addition, other risks are considered including the escalating costs of settling claims and pressures to make insurance rates more affordable. The article concludes with a cautiously optimistic appraisal. The industry, with a few notable exceptions, is somewhat stronger than banking intermediaries. Concerns over a generalized solvency problem, such as that faced by the savings industry, appear misplaced.This research was supported by the John M. Olin Program for the Study of Economic Organization and Public Policy at Princeton University.