This post is part of a series sponsored by AgentSync.
With a series of recent financial institution failures, this is an important time for insurers to reflect on solvency.
Throughout March 2023, the world watched with concernseries of bank failurescreated more volatility than we've seen since the 2008 financial crisis. While each bank's problems had a different cause, the biggest of the recent failures, Silicon Valley Bank, suffered a liquidity collapse, causing it to fail very quickly.
Banking and insurance are two closely related industries and both are tightly regulated to protect consumers from catastrophic losses that can occur when a bank does not have the means to pay its deposits or when an insurance company does not have the means to pay claims.
Each industry has its own regulations that require institutions to maintain a certain amount of liquid funds so as not to collapse financially under pressure. Unfortunately, these regulations do not always prevent the worst-case scenario from occurring. With bank failures at the forefront of our collective consciousness, we thought it was a good time to refresh the meaning of insurance solvency and how it is similar (and different) to solvency in the banking sector.
What is solvency in insurance?
In the most basic sense, solvency is the insurer's ability to pay any claims that arise. This ability relies on the insurer having access to sufficient cash at all times, as well as making smart investments with their premium dollars for future use. Insurance is designed in such a way that insurers pay a small number of claims compared to the total number of policies they issue, allowing these companies to invest the premiums collected and serviced without having immediate access to that cash.
Unfortunately, this model of operation wasworks a little lessin recent years ascatastrophic eventsstill result in a large number of claims concentrated in the same geographic area and over the same time frame. For a more in-depth look at insurance solvency, check out our previously written solvency series,starting with this introduction.
What is bank solvency?
Solvency in banking refers to the ability of an institution to meet all its financial obligations, both short-term and long-term. Just as in the insurance industry, carriers are willing to pay out a certain amount of compensation, so banks must be prepared for the fact that some customers will demand part of their money at any time. Even if a bank doesn't have the cash to pay off all its liabilities immediately, it can be considered solvent if it has enough assets to cover more than its debts and liabilities. On the other hand, the bank's ability toimmediatelygenerating the cash that its customers demand is called liquidity.
What is the difference between solvency and liquidity of a bank?
Financial solvency in the banking sector means that a bank has sufficient assets to cover its liabilities and debts, whether these assets are readily available or held in investments or other financial instruments that are more difficult to use. A bank's liquidity specifically refers to the amount of cash that a bank has at its disposal to meet depositors' requests for their money immediately.
A bank may be solvent but still face a liquidity crisis if too many customers demand too much in a short period of time. When this happens, it's called "banking." And if that sounds familiar, you might be thinking about itThe 1946 classic "It's a Wonderful Life”, or, more recently,runs a bank in Silicon Valleywhich contributed to his downfall.
Why is solvency important in banking and insurance?
The US and global financial systems are deeply intertwined. When an institution faces a crisis, distrust can quickly spread to global financial markets in the form of an "economic contagion." Left unchecked, a bank or insurer's solvency problem can trigger a domino effect that leads to a global economic downturn and even recession.
Why insurance solvency matters
Insurance solvency is essential for consumers who rely on insurance coverage and is therefore also essential to keep the entire global economy functioning.
For example, imagine an insurer that primarily sells home and car insurance in the state of Florida. If a huge hurricane destroys an unexpectedly large number of homes and cars, the insurer may be left without funds to cover all claims. This would leave large numbers of residents without homes to live in or cars to drive, which in turn would affect their ability to earn a living and pay other bills. Without the ability of an insurance company to heal its customers after a disaster, entire communities could be affected financially for years or decades.
Help in the solvency crisis of insurers
Fortunately, consumers whose insurance companies become insolvent can count on help from external sources. While no one wants to rely on these safeguards,stan Guaranteefunds and other government programsit can be the difference between a total loss and some recovery for consumers and businesses.
Why bank solvency matters
In the banking sector, liquidity and solvency are important systemic issues. Each bank invests its customers' deposits in funds around the world that are held by other banks. When one part of the global financial mechanism stops, it can cause other institutions to be unable to honor their own deposits: and the cycle continues. Although we are not economists, we can say that the complex interplay between bank liquidity, the stock market, private companies and consumers is not something to go wrong.
Help during a bank solvency crisis
After the Great Depression, the Banking Act of 1933 created the Federal Deposit Insurance Corporation (FDIC). Since then, consumers and businesses with money in US banks have the assurance that up to $250,000 of their money (in an insured account) will be available, backed by the US government, even if their bank goes bankrupt, liquid or insolvent. Congress later created the National Credit Union Association (NCUA) in 1970 to perform a similar function for credit unions, which are technically not banks.
Banking and insurance solvency and liquidity regulations
Both banking and insurance rely on institutions having enough money to pay their liabilities. But how much money exactly? Over time, the government has established various rules and standards that banks and insurers must follow to reduce the risk of insolvency or lack of liquidity.
While compliance with these principles is not an infallible guarantee that a bank or insurer will never face a solvency or liquidity crisis, they certainly do contribute to reducing the risk of these events occurring. Unfortunately, in recent years, the US government has rolled back some of the protective measures that allow banks to operate with less liquidity than before.Raport z Yale's School of Managementattributes some (though not all) of the Silicon Valley Bank's collapse and subsequent closure to the way the bank operated under less stringent regulations.
Solvency law in the banking sector
After the 2008 financial crisis,The US Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as "Dodd-Frank". One element of this extensive legislation was the establishment of rules on the level of liquidity required by the bank, known as the liquidity coverage ratio (LCR).
In 2019, regulatory authoritiesthe “criteria for determining the applicability of supervisory capital and liquidity requirements for large US banking institutions” were revised;in effect, removing the LCR from banks with assets ranging from $50 billion to $250 billion. While the largest American and global banks are still subject to the LCR, recent events have shown how damaging it can be when even a relatively small bank ($250 billion in assets can be considered small!) does not hold enough liquidity.
Insurance solvency regulations
While there is no national insurance industry regulation equivalent to the Dodd-Frank regulations, each state insurance agency closely monitors insurers in their state for signs of financial health and solvency. All 50 US states and most territories have adopted the NAIC Model Regulationannual financial report, and some countries go even further than required by the Model Law.
You can read much morestate audit and annual reporting requirements here.
The way banking works is like a devastating natural disaster
The huge crowd of customers demanding money from the bank may not seem to have much to do with a Category 5 hurricane approaching Florida. In reality, however, these two events can have the same outcome: the collapse of a financial or insurance institution.
When a large-scale natural disaster forces everyone to replace their homes and cars at once, insurers (especially local and regional insurers) may find themselves without the money to pay all the claims that have accumulated all at once.
Similarly, if the public starts to lose confidence in the bank and everyone starts trying to withdraw their money at the same time, the banks can quickly run out of money to lend.
None of these situations are beneficial for banks and insurers, their customers, businesses or the general public. Therefore, both industries use a combination of risk management strategies (such as diversifying the types and locations of policies they take out or investments they hold) to reduce the risk of a catastrophic natural disaster or the collapse of an insolvent institution, destroying their entire business.
Reduce risk with AgentSync
As you can see, insurance solvency should not be underestimated. And no, AgentSync cannot directly help your insurance company reduce claims losses. However, we can help insurers operate efficiently by saving costs and employee hours spent on tedious, manual and repetitive tasks related to permit compliance management. We can help you reduce the risk of non-compliance, avoid costly fines, and even help retain staff who would rather do valuable work than spend time on repetitive data entry.
Contactus today to see how we can do all this and more for insurers, MGAs and MGUs looking to reduce compliance risks and costs.
FAQs
What is causing the banking crisis of 2023? ›
The 2023 banking crisis was the worst crisis in the US and Europe since the 2007-2008 global financial crisis. This banking crisis was caused by aggressive interest rate hikes by the US Federal Reserve. The increase in interest rates led to huge losses on the portfolios of government bonds held by US banks.
Which banks are collapsing 2023? ›By the numbers: The three banks that failed this year — Silicon Valley Bank (SVB), First Republic Bank (FRB) and Signature Bank — accounted for 2.4% of all assets in the banking sector.
Is bank of America in financial trouble 2023? ›Based on the analysis of Bank of America's financial health, risk profile, and regulatory compliance, we can conclude that the bank is relatively safe from any trouble or collapse. The bank's financial performance has been stable, and its balance sheet shows a healthy level of capital and a diversified loan portfolio.
Can banks seize your money if economy fails? ›The short answer is no. Banks cannot take your money without your permission, at least not legally. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account holder, per bank.
How to become financially stable in 2023? ›- Reduce your monthly bills. ...
- Reassess your credit card habits. ...
- Look for higher rates on your cash. ...
- Sell what you aren't using. ...
- Pick up a side hustle.
According to BAI research, new customer acquisition is the #1 priority for banks in 2023. To unlock their full growth potential, banks must tap into younger generations—segments that desire more convenient, digital-friendly ways of accessing services.
Should I take my money out of the bank 2023? ›Do no withdraw cash. Despite the recent uncertainty, experts don't recommend withdrawing cash from your account. Keeping your money in financial institutions rather than in your home is safer, especially when the amount is insured. "It's not a time to pull your money out of the bank," Silver said.
How many banks are at risk of failing in 2023? ›The Risk of 186 Bank Failures in 2023.
Which US banks are too big to fail? ›- JPMorgan Chase.
- Citigroup.
- Bank of America.
- Wells Fargo.
- BNY Mellon.
- Goldman Sachs.
- Morgan Stanley.
- State Street.
Asset-heavy, diversified and regulated banks like JPMorgan Chase, Wells Fargo, PNC Bank and U.S. Bank are among the safest banks in the U.S. and should be considered if you are weighing your options.
Is Bank of America safe to keep money? ›
Yes, all Bank of America bank accounts are FDIC insured (FDIC #3510) up to $250,000 per depositor, for each account ownership category, in the event of a bank failure.
What would happen if the US banking system collapse? ›If the U.S. economy were to collapse, you would likely lose access to credit. Banks would close. Demand would outstrip supply of food, gas, and other necessities. If the collapse affected local governments and utilities, then water and electricity might no longer be available.
Where is the safest place to keep cash at home? ›Where to safely keep cash at home. Just like any other piece of paper, cash can get lost, wet or burned. Consider buying a fireproof and waterproof safe for your home. It's also useful for storing other valuables in your home such as jewelry and important personal documents.
How can I protect my money from a bank collapse? ›- Don't Panic. ...
- Research Your Bank's Solvency. ...
- Ensure Your Bank Is Insured. ...
- Don't Exit the Markets. ...
- Don't Exceed the FDIC Limit at Any One Bank. ...
- Consult a Financial Advisor.
If you're worried about keeping money in your bank account during a recession, you can rest assured that your money will likely be safe at a financial institution, and you won't need to take it out of your bank account.
How to prepare for bank collapse 2023? ›- Keep debts under control. ...
- Review your tolerance for losses. ...
- Build up your liquidity. ...
- Re-evaluate your job prospects. ...
- Delay retirement if you can.
You might need $5 million to $10 million to qualify as having a very high net worth while it may take $30 million or more to be considered ultra-high net worth. That's how financial advisors typically view wealth.
What are the top economic concerns for 2023? ›- An imminent recession. ...
- Stubborn inflation. ...
- China's COVID chaos. ...
- An energy crisis. ...
- Geopolitical tensions, technology war.
Growing deposits will be a priority in 2023. Banks' concerns over small business deposits soared to 72% from 41% in 2022. For credit unions, retail deposits topped the list, skyrocketing from 18% in 2022 to 70% in 2023.
Which bank is best in 2023? ›- 1) State Bank of India (SBI) Savings Account.
- 2) HDFC Bank Savings Account.
- 3) Kotak Mahindra Bank Savings Account.
- 4) DCB Bank Savings Account.
- 5) RBL Bank Savings Account.
- 6) IndusInd Bank Savings Account.
- 7) ICICI Savings Bank Account.
- 8) Axis Bank Savings Account.
Which bank is predicting a recession? ›
Three major banks are bracing for an economic downturn in 2023, including an uptick in unemployment, even as they continue to benefit from strong consumer spending and higher interest rates.
What is the most money you should keep in a bank account? ›A long-standing rule of thumb for emergency funds is to set aside three to six months' worth of expenses. So, if your monthly expenses are $3,000, you'd need an emergency fund of $9,000 to $18,000 following this rule. But it's important to keep in mind that everyone's needs are different.
What is the most money you should keep in a bank? ›Most financial experts end up suggesting you need a cash stash equal to six months of expenses: If you need $5,000 to survive every month, save $30,000. Personal finance guru Suze Orman advises an eight-month emergency fund because that's about how long it takes the average person to find a job.
Is $20000 in the bank good? ›$20,000 can be a healthy amount of savings but this largely depends on several factors, including your age, income, lifestyle or choice of retirement account. If you are under 45, $20,000 in savings would be considered above average.
What banks are collapsing? ›| Bank Name, City, ST | Press Release (PR) | Approx. Deposit (Millions) |
|---|---|---|
| First Republic Bank, San Francisco, CA | PR-034-2023 | $103,900.00 |
| March | ||
| Signature Bank, New York, NY | PR-021-2023 PR-018-2023 | $88,600.0 |
| Silicon Valley Bank, Santa Clara, CA | PR-023-2023 PR-019-2023 | $175,400.0 |
Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations. An example is when borrowers default on a principal or interest payment of a loan. Defaults can occur on mortgages, credit cards, and fixed income securities.
What is the #1 most trusted bank in America? ›The Lifestory Research 2022 America's Most Trusted® Bank Study found Chase the most trusted bank. The America's Most Trusted® Study is a large-scale survey of consumers in the United States that seeks to identify the brands that people trust the most within their respective industries.
Where do you put your money during a banking crisis? ›The FDIC protection for deposits makes banks look appealing in difficult times, but there are alternative places to put money. Federal bonds are considered very safe but have very low returns. Real estate can produce income but can be risky. Precious metals, especially gold, offer an alternative to stocks and bonds.
What is the strongest bank in America? ›| Rank | Bank name | Headquarters location |
|---|---|---|
| 1 | JPMorgan Chase | New York City |
| 2 | Bank of America | Charlotte |
| 3 | Citigroup | New York City |
| 4 | Wells Fargo | San Francisco |
Your money is safe in a bank with FDIC insurance
A bank account is typically the safest place for your cash, since banks can be insured by the Federal Deposit Insurance Corp. up to $250,000 per depositor, per insured institution, per ownership category.
Which is the most secure bank in the world? ›
| Rank | Bank | Country |
|---|---|---|
| 1 | KfW | Germany |
| 2 | Zürcher Kantonalbank | Switzerland |
| 3 | Landwirtschaftliche Rentenbank | Germany |
| 4 | L-Bank | Germany |
Why are credit unions safer than banks? Like banks, which are federally insured by the FDIC, credit unions are insured by the NCUA, making them just as safe as banks. The National Credit Union Administration is a US government agency that regulates and supervises credit unions.
Is my money safe if the banks crash? ›Yes, if your money is in a U.S. bank insured by the Federal Deposit Insurance Corp. and you have less than $250,000 there. If the bank fails, you'll get your money back. Nearly all banks are FDIC insured.
Should you keep all your money in your bank account? ›Unless your bank requires a minimum balance, you don't need to worry about certain thresholds. On the other hand, if you are prone to overdraft fees, then add a little cushion for yourself. Even with a cushion, Cole recommends keeping no more than two months of living expenses in your checking account.
Can the government take money from your bank account in a crisis? ›So, can the government take money out of your bank account? The answer is yes – sort of. While the government may not be the one directly taking the money out of someone's account, they can permit an employer or financial institution to do so.
What happens to my mortgage if the economy collapses? ›Recessions and housing market crashes may cause your house's value to decrease. However, your set mortgage rates won't lower, meaning your monthly payments will be higher than your home's worth. While many may dip into their savings to help pay the steep bills, others may need outside assistance.
How many US banks failed because of the stock market crash? ›Overall, these runs, and the financial impact of the stock market crash resulted in the failure of about 9,000 banks throughout the 1930s. This catastrophic event led to the creation of the Federal Deposit Insurance Corporation [FDIC] on June 16, 1933.
Which banks are at risk? ›- First Republic Bank (FRC) - Get Free Report. Above average liquidity risk and high capital risk.
- Huntington Bancshares (HBAN) - Get Free Report. ...
- KeyCorp (KEY) - Get Free Report. ...
- Comerica (CMA) - Get Free Report. ...
- Truist Financial (TFC) - Get Free Report.
“Emergency funds should not be held at your home, they should be stored in a high-yield savings account of your choice.” McCarty framed it more in terms of a ratio: “In terms of amount, don't let your cash exceed 10% of your overall emergency fund and/or $10,000.
How much cash should I always carry? ›“We would recommend between $100 to $300 of cash in your wallet, but also having a reserve of $1,000 or so in a safe at home,” Anderson says. Depending on your spending habits, a couple hundred dollars may be more than enough for your daily expenses or not enough.
How many people have $3,000,000 in savings? ›
1,821,745 Households in the United States Have Investment Portfolios Worth $3,000,000 or More.
What banks have failed in 2023? ›Silvergate Bank and Signature Bank, both with some exposure to cryptocurrency, failed in the midst of turbulence in that market. Silicon Valley Bank (SVB) failed when a bank run was triggered after it sold its Treasury bond portfolio at a large loss, causing depositor concerns about the bank's liquidity.
How do millionaires keep their money in banks? ›Millionaires don't worry about FDIC insurance. Their money is held in their name and not the name of the custodial private bank. Other millionaires have safe deposit boxes full of cash denominated in many different currencies.
Which bank is safest in USA? ›Asset-heavy, diversified and regulated banks like JPMorgan Chase, Wells Fargo, PNC Bank and U.S. Bank are among the safest banks in the U.S. and should be considered if you are weighing your options.
Is cash King during a recession? ›For investors, “cash is king during a recession” sums up the advantages of keeping liquid assets on hand when the economy turns south. From weathering rough markets to going all-in on discounted investments, investors can leverage cash to improve their financial positions.
What are the main causes of a banking crisis? ›Common causes of banking crises include economic recessions, poor lending practices, excessive risk-taking, lack of regulation or oversight, and external shocks like pandemics or natural disasters.
What changes to banking 2023? ›Mobile banking, artificial intelligence and chatbots, open banking, and cryptocurrency are just a few of the digital banking trends reshaping the industry. Personalized banking, augmented reality, voice banking, and cybersecurity are set to shape the banking industry in the coming years.
What trend will have the biggest impact on banking by 2025? ›Responsive Resilience
Resilience will become a key watchword for BFS companies through 2025. Volatility, digitization and increased regulatory scrutiny will drive innovation as companies work to respond seamlessly to both new threats and shifting customer demands.
Despite the recent uncertainty, experts don't recommend withdrawing cash from your account. Keeping your money in financial institutions rather than in your home is safer, especially when the amount is insured. “It's not a time to pull your money out of the bank,” Silver said.
Does bank of America claim a recession is coming early 2023? ›"Our base projection is for a recession to occur in the U.S. economy beginning in the third quarter of 2023, occur through the fourth quarter of 2023 and into the first quarter of 2024," Moynihan said. The bank, he said, predicted the quarterly contractions would range between 0.5% and 1%.
What is the future of payments 2023? ›
The future of payments will involve a greater emphasis on digital and mobile payments, as well as the continued development of peer to peer technologies. Also, Contactless payments, using technologies like NFC, will become more prevalent.
What will banking look like in 2025? ›By 2025, Alan McIntyre, senior managing director for banking at Accenture, expects payments to move completely away from cards and phones toward wearables and biometrics. “Whether it is tapping a ring that you wear or facial recognition, the payment will become more seamless,” he said.
Where is the future of banking going? ›Through AI and robotics, the banks of the future will be able to operate without any human assistance. Searches for “banking automation” have grown by 153% in the last 12 months. 65% of banking executives believe that zero-human banking will become a reality in the future.
What will be the changes in future of banking? ›In the next era, banks can realign to compete in new arenas, organized around distinct customer needs. These arenas will expand far beyond the current definition of financial services, and they will also be hotly contested by a wide range of tech giants, tech start-ups, and other nonbanks.
Who has the safest banks in the world? ›KfW Bank (Germany)
Established in 1948, KfW Bank's primary goal is to support domestic and international economic development. With an excellent credit rating and strong backing from the German government, KfW Bank ranks as the safest bank globally.