Occhidiangela,Sep 12 2005, 04:56 AM Wrote:Then let every shareholder, board member, and executive in that company cough up the dough to make the difference for their claims. And let them go under once every nickel is paid out to policy holders.
There are reserve requirements. There is massive regulation for insurance companies. Their busniess is risk and risk mitigation.
There is no free lunch, there is no security, there is no entitlement.
Occhi
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Well, that's not how a limited liability company works.
As to risk and risk mitigation, insurance, like banking works on the principal that not everyone will withdraw simultaneously. Insurance companies 'package up' their risks and trade them with other companies to diversify their risk, just like banks do with mortgages.
However, prudential regulation requires that (for banks over here at least) a bank must maintain a minimum of 6% tier one capital and have at least 12% tier 1 and two capital. Tier 1 capital is essentially shareholder funds, and tier two capital is essentially long term debt financing that can almost be treated like equity. You will notice here how the company only has 12% coverage to be considered prudential... and so can lend eight times as much as it has coverage for.
So what happens when you get a 100% event? The company goes bankrupt, the shareholders lose all value, any lenders to the invesetment company loses all money, any purchasers of 'risk packages' is fully liable to pay them, and any mom & pop investors that were sticking in funds to the company to get a better return than the bank lose their entire deposit.
Such is capitalism.
I'll try finding out the U.S. capital adequacy requirements for banks and insurance companies, seem to remember a 20:1 ratio (i.e. 5% coverage), but probably wrong...
--Edit
U.S. requirements for Bank tier 1 capital is 3-4%