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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
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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 

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