Here, NJM’s James Jurica, CFP® discusses how insurers differ from banks, and what it means for your investment strategy.
Banks operate and manage client deposits much differently than insurance companies because they serve different purposes.
Banks borrow short and lend long and in the fractional reserve banking system this can lead to issues if every single depositor wants to withdraw their funds at once. No banks can handle a true bank run, as they are simply not designed for it.
JP Morgan is one the most solvent banks in the world with 567 billion in cash while having 2.2 trillion in customer deposits. Having a reserve that is less than deposits is typically not an issue in most cases, because bank runs are extremely rare. However, it is easy to see how banks can have insolvency issues in extreme cases due to the lack of dollar for dollar reserves. PLEASE NOTE - I am not saying Chase is in trouble. It is one of the most solvent banks in the world. I was just using their numbers as an example.
Insurance companies operate differently, and they have much higher capital requirements. Not only are all deposits in life insurance cash value and annuities backed up dollar for dollar, many insurance companies run a surplus. This means they can pay out the surrender value of every annuity and permanent life policy (cash surrender value, not death benefit) on the books and still have money left over to run the company. Below are a list of some large Carriers that many of you are working with, showing what they currently have in surplus above and beyond their reserve obligations.
To put into perspective how much money this is, below are some well-known companies and their market caps.
The point that I’m trying to make, is that the insurance companies we work with could pay out every surrender value on their policies and still have money left over to go out and buy one of the companies listed above in addition to running their existing company. This is a great story to be telling to clients as many are scared about the recent events in the banking industry.
The truth is, that insurance companies are some of the strongest financial institutions, and clients should feel comfortable investing money with them. Now you have the facts to back it up.
If you have questions, please reach out to us at www.njmnwa.com.