Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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New topic 2020-05-31 18:15:42 TITLE economics
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Insurance Commissioner Role in Bond Prices

The Ninth Constitutional Amendment restricts federal law to a handful of topics, mainly national defense and taxes -- all other topics are to be covered by state laws. While federalists have always regarded this balance of power as an unwelcome compromise, gradually chipping away at it for two hundred years, state domination of the business of insurance has remained securely under the control of the state insurance commissioner. As John Dickinson predicted, there has been a steady tendency for the laws of the largest state to set the pattern which the others usually follow by reciprocity. In this case, dominance of state insurance laws has gradually shifted from New York to California. As a further consequence, state insurance laws have grown more liberal.

For this reason, state laws generally follow the pattern of limiting insurance portfolios to no more than 25% common stock, although there is no law or constitutional provision that they must do so. The explanation usually offered is that although stocks generally pay higher dividends, a guaranteed bond dividend comes closer to matching the liabilities of insurance that do variable stock dividends. And originally that may have been true, although gradually changes in other things may well have been responsible for maintaining such an apparently bizarre pattern of lobbying for lower dividends for yourself.

Compendia have been produced, showing blue-chip stock dividends (or index funds) have averaged 12% returns for a hundred or more years, while bond returns have averaged 5%. Life expectancy has meanwhile lengthened by nearly thirty years. While there may be legitimate arguments for gradual lowering the limit rather than abruptly doubling it, the consequences of doing something like that are huge. Furthermore, the variability of insurance products defies blanket rules as they once did not, the expansion of life expectancy is as likely in the future as it was in the past, and its unknowable likelihood can be judged as well by one profession as another. Insurance executives have gradually shifted all risk from the company to the customers, and it is time to consider how simple it would be to shift it back. Arguments and risks would also appear for the stockholders of stock index funds as stockholders absorb more of the risk, although the numbers are so large that probably no one would agree to anything but gradual shifts as proof of concept.

Originally published: Tuesday, November 26, 2019; most-recently modified: Wednesday, December 18, 2019

 

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