Life is a Highway – and We Can’t Drive It without the Insurance Industry

Bill Hulse
Senior Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce

Published

April 15, 2019

In 1991, Tom Cochrane released his famous song, "Life is a Highway," and Congress that year passed a major transportation funding bill. A big year for infrastructure to be sure, and one we are still struggling to push forward. But what is not as well known is that private industry, specifically the insurance industry, plays a big part. Did you know that every year, insurers fund road construction that would build a highway between Washington D.C. and Los Angeles?

The insurance industry is more than just collecting premiums and paying claims, as many people may think. By providing reliable, long-term financing for our economy, the insurance industry has the ability to help build roads, schools, houses, and Main Street businesses. It provides vital contributions to the U.S. economy, and puts policies in place that will help harness growth-generating investments.

Policymakers and the public as a whole should recognize the significant investment the insurance industry provides to the U.S. economy. At a recent event hosted by the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC), a first of its kind report was released, which focuses on the role of insurance investment in the U.S. economy. According to the report, assets of the U.S. insurance industry totaled approximately $5.8 trillion as of December 2017.

U.S. insurers play an especially important role in the markets for corporate bonds and municipal bonds – their investment makes up about 20% of both. These companies invest for different purposes than other institutional investors and play a significant and important role across capital markets. For example, the industry’s investments in education projects through municipal bond purchases could build roughly 1,000 elementary schools every year. Likewise, its annual investments in municipal bonds for transportation projects could build that highway.

To fund these investments, insurance company assets need to match projected liabilities. Generally, long-term insurance products are supported by long-term assets while short-term insurance products are supported by short-term assets. For example, life insurance companies are focused on ensuring a steady stream of long-term income to pay for future liabilities in the form of policyholder claims. Life insurance products tend to be long term and illiquid in nature, and this allows insurance companies to invest in assets that match this profile, such as long-term debt like municipal bonds. Similarly, automobile policies, which are generally shorter in duration, would be supported by more liquid assets like corporate debt and some low-risk equities. Therefore, policies that restrict certain insurance policies reduce investment in correlated assets.

These types of investments from the insurance industry stimulate our economy, but overreaching regulations would restrict insurers’ ability to fund investment in infrastructure projects and other pro-growth activities. For example the International Association of Insurance Supervisors (IAIS) has proposed unnecessarily restrictive regulations that do not align with how insurance is regulated in the U.S. Policymakers should be wary of the disruption to investment by insurance firms if regulations like these were adopted in the U.S. without significant modification. The National Association of Insurance Commissioners (NAIC) and the Federal Reserve are developing an alternative approach that is better aligned to how insurance is traditionally regulated in the U.S., not to mention our capital markets.

Subjecting insurance firms to regulations designed for banks similarly impedes their ability to efficiently invest policyholder premiums. In response to the financial crisis, some firms were designated by the Financial Stability Oversight Council (FSOC) to be supervised by the Federal Reserve. This bank-like regulation for insurance firms is a blunt instrument that has been shown to do more harm than good. Fortunately, FSOC recently announced a move toward an activities-based approach with a focus on primary regulators identifying and taking actions to mitigate systemic risk, and would only call for Federal Reserve regulation if the benefits can be shown to exceed the costs. Capital standards and bank-like regulation are just two examples of how investment could be inadvertently inhibited.

U.S. insurance companies finance long-term improvements in the U.S. economy that drive much-needed municipal infrastructure investments; support developers as they improve and construct commercial and multifamily properties; help farmers purchase needed land, buildings, and equipment; and fund a wide variety of business activity.

A lot has to go right for one to have a pleasant ride on life’s highway. The same is true for our economy. Policymakers cannot ignore the beneficial role the insurance sector plays in the U.S. economy. Upsetting that balance will take away a vital source of capital for our economy.