Finance and Economics Discussion Series (FEDS)
February 2016
The Resolution of a Systemically Important Insurance Company during the Great Depression
Abstract:
This paper explores the economic issues related to systemically important insurance companies, using an example from the Great Depression, the National Surety Company. National Surety was a large and diverse insurance company that experienced a major crisis in 1933 due to losses from its guarantees of mortgage-backed securities. A liquidity crisis ensued, as policyholders staged a massive run on the company, demanding the return of their unearned premiums. The New York State Insurance Commissioner stepped in with a reorganization plan that split the company in two, out of fear that a disorderly liquidation would have systemic consequences given the sheer number of the company's counterparties, scattered all across the United States. A key dynamic of the crisis was that policy holders at an insurance company have a dual role as holders of liabilities and as providers of income.
Keywords: Insurance, great depression, surety, systemic importance
DOI: http://dx.doi.org/10.17016/FEDS.2016.005
PDF: Full Paper