Insurance is a complicated thing because it has been regulated for centuries and it's often regulated at the local level. In the United States insurance is a really local phenomenon. The Dodd Frank Act of 2010 created a federal insurance office. But it's really mainly just a monitoring for risk. There are no national insurance companies, they all have state charters. Also, what protects you if your insurance company goes under? Well, the regulator is supposed to have checked that they're doing things right. But what if the regulator messes up and you buy insurance? And now there's some big catastrophe and the insurance company goes bankrupt and can't pay you. So the state governments have set up insurance guarantee funds. There's a lot of complexity to this whole business. It's not so simple and easy. So the first step, it wasn't until the 20th century that these even setup. It's like deposit insurance when you have a bank. When you go to the bank, you'll see FDIC insured, Federal Deposit, Insurance Corporation, but we have similar insurance of the failure of the insurance companies. But not until 1941. There was no insurance guarantee. So, here's our local insurance guarantee fund, Connecticut Life and Health Insurance Guaranty Association. It was created in 1972, it's not, that long ago. It's kind of remarkable, that before 1972 if your insurance company failed in Connecticut you were just out of luck. But now they will ensure your insurance against a maximum death benefit of $50,000. It's still not big enough because if you as a young person, what is your present value, your lifetime present value? It must be several million dollars. So $500,000 just doesn't cut it, but at least it's something. Other countries have insurance. The China Insurance Regulatory Commission has set up a state-owned non-profit called China Insurance Protection Fund that protects people against the failure of an insurance company. But again, they're limited to 50,000 yuan, which is not much money. So we still live in a world that's highly, you gotta watch what you get into and check things. One thing I like, this is a course in financial markets, and I like this institutional detail because to me, it's what makes things work. >> So, when you're talking about AIG the last lecture and how they take the whole government bailout, what's preventing them from committing their own moral suspicion of moral dubiousness. If they know hat there's something like a big catastrophes coming again, they'll get another bail out because they're so big. Are there regulations im place? >> Well the financial crisis of 2008 took everyone by surprise. The bailouts weren't the planned course of action. It just happened. It got so severe so suddenly that the government stepped in. In the US and in other countries to protect the integrity of the whole financial system. Now the issue now is does this set a precedent that insurance companies will say, hey we don't need reserves because we'll just get bailed out. Well that's a concern and it's been a concern of law makers. Part of the issue though is that AIG was bailed out but the stock holders did not do well. They didn't enrich the stock holders. It was a disaster. On top of that I think that our new regulations are stiffer and and are more aware of that crisis, but you are getting at a really important problem that too big fail is a natural problem. When you have a complicated interdependent economic system and if one big company like AIG fails, that was the biggest insurance company in the world. Once one company like that fails, the government isn't wanted to just let it everything fall where it may. There's a natural tendency to bail out and it's hard to get past that. We're making efforts to, but it's a fundamental problem. The US Government took over securities regulation in the 1930s after the Great Depression. They formed the Securities and Exchange Commission to regulate stocks and bonds from the federal level. They never did that for insurance. In fact the McCarran-Ferguson Act of 1945 delegated insurance regulation to the states. So there's 50 different state regulators, all different. Now this is chaos, because companies like to operate nationally, but they have 50 different regulators, one for each state. So there was a non-profit called National Association of Insurance Commissioners, NAIC, which is not government. It's set up by the insurance industry and they have regular meetings creating suggested laws for insurance. That helps reduce the complexity of the US insurance system, because at least the state governments talk with each other, and standardize their insurance laws somewhat.
