Don't subsidize insurers

(breakingviews.com) -- U.S. insurers want government aid. But their lobbyists say that, unlike banks, solvency isn't their problem. Rather, they want government capital injections so they can invest the cash in riskier investments, which will help unfreeze credit markets. But that seems more like a way to extract a nice subsidy for their shareholders than an efficient way to promote lending.

The government's Troubled Asset Relief Program is meant to serve two purposes - maintaining systemic financial market stability and getting lending going. In both of these cases, aiding banks makes more sense.

Unlike banks, insurers aren't particularly prone to liquidity squeezes. Policy premiums usually flow in before policies pay off.

And it's hard to claim insurers pose a systemic threat. Sure, they are large investors in corporate bonds, owning about 20% of those outstanding. But insurance company failures almost always result from mismanagement or writing policies too cheaply - not systemic knock-on effects. Or, like American International Group (AIG, Fortune 500), the problems stem from non-insurance gambles, like financial products.

Moreover, unlike banks, low capital levels don't make insurers implode dramatically. An undercapitalized bank often takes lots of high-risk gambles in the hope one will pay off. This saddles taxpayers with losses when the gambles fail. In contrast, undercapitalized insurers usually have trouble attracting new business because clients fear they won't be able to honor their policies.

In any case, most insurance companies claim they are well capitalized. U.S. life insurers on average have three times required capital.

This leaves "getting lending going" as the remaining rationale. Insurers are big buyers of everything from corporate bonds to more esoteric investments. But they have pulled in their horns over the past several months, and are pushing more money into Treasuries. Cheaper funding hardly seems the way to reverse this. Also, insurers favor high quality debt, for which there's already sufficient demand.

If insurers are solvent, and policyholders have nothing to fear, then government capital injections are nothing more than subsidies to their shareholders. That's no reason for taxpayers to open their wallets.