Hostname: page-component-8448b6f56d-c47g7 Total loading time: 0 Render date: 2024-04-19T20:51:04.659Z Has data issue: false hasContentIssue false
  • English
  • Français

Financial crises at insurance companies: learning from the demise of the National Surety Company during the Great Depression

Published online by Cambridge University Press:  11 January 2018

Jonathan D. Rose
Jonathan D. Rose*
Affiliation:
Board of Governors of the Federal Reserve System
Get access Rights & Permissions [Opens in a new window]

Abstract

This article explores the economic issues related to financial crises at insurance companies, using an example from the Great Depression, the National Surety Company. National Surety was a large and diverse American insurance company that experienced a major crisis in 1933 due to losses from its guarantees of mortgage-backed securities. I find that policyholders were able to stage a massive run on the company by demanding the return of their unearned premiums. A key dynamic of the crisis was that policyholders at an insurance company have a dual role as holders of liabilities and as providers of income. In addition, I establish that government officials believed National Surety to be systemically important, due to the size of its insurance business and because many of its counterparties were societal actors that these officials sought to protect. As a result, the New York State Insurance Commissioner used emergency powers to reorganize the company, with the goal of providing continuity to its business lines outside mortgage-backed security insurance.

Keywords

insurance companiesfinancial crisisGreat Depressionrun

JEL classification

H8: Miscellaneous Issues G22: Insurance • Insurance Companies • Actuarial Studies G01: Financial Crises N22: U.S. • Canada: 1913–
Type
Articles
Information
Financial History Review , Volume 24 , Issue 3 , December 2017 , pp. 239 - 264
Copyright
Copyright © European Association for Banking and Financial History e.V. 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Sources

Best's Insurance Reports: Casualty and Miscellaneous Google Scholar
Eastern Underwriter Google Scholar
Insurance Field Google Scholar
National Underwriter Google Scholar
National Surety Papers. In the matter of the application of The People of the State of New York, by George S. Van Schaick, as Superintendent of Insurance of the State of New York, for an order to take possession of the property and rehabilitate the National Surety Company. Index number 16491/1933. Papers filed in the Supreme Court of New York State, New York County.Google Scholar
Reconstruction Finance Corporation Papers. Paid Loan Files, Box 874, Record Group 234, National Archives, College Park, MD.Google Scholar
The Spectator Google Scholar
Weekly Underwriter Google Scholar

References

Acharya, V. and Richardson, M. (2014). Is the insurance industry systemically risky? In Biggs, J. and Richardson, M. (eds.), Modernizing Insurance Regulations. Hoboken, NJ: John Wiley & Sons.Google Scholar
Ackerman, S. (1928). Insurance, a Practical Guide for Various Forms of Coverage; The Policy Contracts and the Protection Afforded Purchasers. New York: Ronald Press.Google Scholar
Arnold, E. (1927) Outlines of Suretyship and Guaranty. Chicago: Callaghan and Co.Google Scholar
Bergstresser, D., Cohen, R. and Shenai, S. (2010). Financial guarantors and the 2007–2009 credit crisis. Working Paper.Google Scholar
Crobaugh, C. and Redding, A. (1929). Casualty Insurance. New York: Prentice Hall.Google Scholar
Cummins, J. and Weiss, M. (2014). Systemic risk and the U.S. insurance sector. Journal of Risk and Insurance, 81, pp. 489–528.CrossRefGoogle Scholar
Fisher, E. (1951). Urban Real Estate Markets: Characteristics and Financing. New York: National Bureau of Economic Research.Google Scholar
Halliburton, R. (1939). The Real Estate Bond House. Franklin, IN: Indiana University.Google Scholar
Harrington, S. (2009) The financial crisis, systemic risk, and the future of insurance regulation. Journal of Risk and Insurance, 76, pp. 785–819.Google Scholar
Jones, J. (1951). Fifty Billion Dollars: My Thirteen Years with the RFC, 1932–1945. New York: Macmillan.Google Scholar
Joyce, W. (1906). Address on Proper Reserves for Fidelity and Surety Claims.Google Scholar
Kandarian, S. (2013). Life insurers as SIFIs: a case of mistaken identity? Speech delivered at the United States Chamber of Commerce. www.metlife.com/assets/cao/pr/Capital-Markets-Summit-Remarks-FINAL.pdf Google Scholar
Kniskern, P. (1926). Methods of issuing guaranteed mortgages. Annals of Real Estate Practice, vol. iv: Real Estate Finance, Proceedings & Reports of the Mortgage & Finance Division. Chicago: National Association of Real Estate Boards.Google Scholar
Lunt, E. C. (1922). Surety Bonds: Nature, Functions, Underwriting Requirements. New York: Ronald Press.Google Scholar
Mackall, L. (1929). Principles of Surety Underwriting. Chicago: The Spectator Company.Google Scholar
Mckenna, E. (1927). The guarantee of mortgage bonds by surety companies. Annals of the American Academy of Political and Social Science, 130, pp. 131–6.Google Scholar
Nichols, H. (1933). Bankers and Brokers Blanket Bonds. New York: National Surety Corporation.Google Scholar
Pettit, H. and Caruthers, A. Jr (1925). Fidelity and Surety Bond Digest. New York: Eastern Underwriter.Google Scholar
Schwarcz, D. and Schwarcz, S. (2014). Regulating systemic risk in insurance. University of Chicago Law Review, 81, pp. 1569–1640.Google Scholar
Snowden, K. (2010). The anatomy of a residential mortgage crisis: a look back to the 1930s. In Mitchell, L. and Wilmarth, A. (eds.), The Panic of 2008: Causes, Consequences, and Implications for Reform. Cheltenham: Edward Elgar.Google Scholar
The Spectator (1907). Surety, Plate Glass, and Miscellaneous Insurance. New York: Spectator Co.Google Scholar
United States Fidelity and Guaranty Company (1920). Text Book, Fidelity Bonds, Surety Bonds, Casualty Policies; The Principles Governing Their Underwriting; The Methods of Constructive Salesmanship and the Service in Connection with Them. Baltimore: United States Fidelity and Guaranty Company.Google Scholar
Wheeler, W. (2012). Testimony before the United States House of Representatives, Financial Institutions and Consumer Credit Committee.Google Scholar
The Yale Law Journal (1934). Comment: Rehabilitation of the National Surety Company. The Yale Law Journal, 43, pp. 1146–56.Google Scholar