LETTER

The certainty of insurance and pension collapse

 

Paying life insurance for a pension? Please regard everything that you "invest" as money down the toilet.

For the last 250 years, insurance companies and pensions have operated, at root, in the same manner. 90% of premiums are used to buy long-term government debt, namely treasury bonds. The 10% or 15% interest funds all their accident claims and pays for all the pensions.

Today, near-zero interest rates leave these companies unable to finance their outlays through government bonds. To counter this, insurance and pension companies have had to redirect ever-increasing amounts of funds into dealing in stocks and shares, real estate, and highly volatile derivatives in order to generate the income they need. Across Toronto, a small army of brokers descends on Bay Street each morning like professional poker-players who have to beat all-comers to keep their insurance and pension employers afloat for another day.  Some projections suggest that within a few months, more than 30% of insurance funds will be in these risky sectors.

Whilst the price of condos and the world stock markets keep soaring, it might be possible to stay ahead of the game if they don't make any big mistakes. But what if they do -- or the real estate or stock markets begin to slide?  Already, Great West Life, who insures my own teeth, for instance, has stumbled in the markets and its share price is seriously down.

The collapse of just one major pension or insurance company would be catastrophic: not only would it shatter confidence, shutting off income from new customer premiums to the entire industry, but, since insurance companies have been stacking away Treasury Bond for up to 250 years, the deluge of the government debt held by a failing insurer hitting the market would drive its price through the floor in a mega-stock market crash and make funding of government by raising new debt nearly impossible.

RAISING interest rates is the only way to escape this, yet governments worldwide are poised to drive them even lower. This is utterly suicidal and makes a certainty of a sudden total collapse, in a matter of hours, as the first huge insurance company suddenly fails out-of-the-blue, with all the others following hours afterwards.

With pensions gone, it will be the old-age pensioners losing all who will be the first to the wall.

This is not some hairy-fairy theory, but as certain as politicians behaving like little kids playing with a tank of gasoline and a box of matches: you know the outcome.

Robert L Thompsett
Aylmer