Life Insurance: Providing Long‐Term Stability in a Volatile World

• Date: 01 September 2012
• DOI: http://doi.org/10.1111/j.1540-6296.2012.01220.x
• Author: Therese M. Vaughan
• Published date: 01 September 2012

Risk Management and Insurance Review

C

Risk Management and Insurance Review, 2012, Vol.15, No. 2, 255-261

DOI: 10.1111/j.1540-6296.2012.01220.x

LIFE INSURANCE:PROVIDING LONG-TERM STAB IL IT Y

IN A VOLATILE WORLD

Therese M. Vaughan

“The country was in a precarious situation at that time. Banks were failing all around us;

business houses were closing their doors; Europe was broke and bankruptcy was the order of the

day. Insurance alone was standing as the last line of defense against the ravages of chaos.”

Commissioner John Kidd of Indiana, defending the December 1931 decision by the

National Convention of Insurance Commissioners (NCIC) to value insurer invest-

ments using means other than current market values. (October 18, 1932) Proceedings

of the NCIC, Sixty-third session, 1932, p. 129.

It has long been recognized that, among the various sectors of the financial services in-

dustry, a key distinguishing feature of the insurance sector (particularly life insurance)

is the time horizon in which it operates. While this was recognized before the recent

crisis, the significant implications have not always been appreciated. These implications

become more apparent during a period of turmoil, when liquidity shrinks and volatility

increases. Today we arerelearning the lessons that were learned by scholars and super-

visors during the Great Depression: market prices do not necessarily reflect fundamental

values, and insurers can provide a source of stability during times of upheaval. Because

of that, they serve an important role for individual consumers and the broader society.

Even before the recent financial crisis, questions were being raised about the extent

to which the efficient markets hypothesis adequately described the operation of the

financial markets. Many scholars now accept the premise that market values at a point

in time can differ from fundamental or intrinsic values—that is, in the short term, market

prices may not reflect the value to be gained from that asset over the long term. Suggested

causes for this divergence include an absence of market liquidity, the relative interplay

between na¨

ıve and informed investors in the market, and changes in investors’ appetite

for risk. There is a new appreciation for the limits to our understanding of the actual

drivers of credit spread volatility, and we now have a whole new stream of research

Therese M. Vaughanis the Chief Executive Officer of the National Association of Insurance Com-

missioners (NAIC), a position she assumed in February 2009. She can be reached at NAIC Execu-

tive Office, 444 North Capitol Street NW,Suite 701, Washington, DC; e-mail: tvaughan@naic.org.

This article was subject to double-blind peer review.

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