Great link to Prof Trevor Jackson’s review of Martin Wolf. Our political failure to align how capitalism is practised with democratic and social values that support the structures that make a state and its institutions work - what Jackson calls “communities of obligation” - is a disgrace, and isn’t being called out
I want to note that I recently learned of a new term: bio regionalism from Nate ‘ excellent podcast. It is movement that is seeing revival for very obvious reasons. The focus of the movement is for communities to restore and tend their watersheds. Watersheds are regional climate management. They are the natural world’s air-conditioning and sprinkler system.
Our regional watersheds are both the key to resilience and transition from a global economy made unworkable by its own behavior.
Global private insurance companies are exposed to **synthetic leverage** through their investment portfolios, risk management strategies, and product offerings. Here’s a breakdown of the key channels of exposure:
---
### **1. Investment Portfolios and Derivatives**
Insurance companies invest premiums in assets (e.g., bonds, equities, alternatives) to generate returns. Synthetic leverage arises when they use derivatives to amplify exposure to these assets:
- **Futures and Options**: Insurers may use equity index futures or interest rate swaps to gain leveraged exposure to markets while committing less upfront capital. For example, a small margin deposit in futures can control a large notional value, magnifying gains or losses.
- **Structured Products**: Investments in leveraged ETFs, collateralized loan obligations (CLOs), or hedge funds that employ derivatives can introduce hidden leverage into portfolios.
- **Risk**: Market downturns or volatility can lead to outsized losses relative to capital allocated, straining liquidity or solvency.
---
### **2. Hedging Strategies**
Insurers use derivatives to hedge risks (e.g., interest rate, currency, longevity), but these strategies can inadvertently introduce leverage:
- **Interest Rate Swaps**: Used to match liabilities (e.g., long-term policies), but swaps require minimal margin upfront. A sudden rate shift could trigger large collateral calls.
- **Credit Default Swaps (CDS)**: Selling protection via CDS (as AIG did pre-2008) creates synthetic leverage—insurers collect premiums but face exponential losses if defaults spike.
- **Reinsurance Sidecars**: Derivatives-linked reinsurance structures (e.g., catastrophe bonds) can embed leverage, amplifying losses in extreme events.
---
### **3. Liability-Driven Products**
Products like **variable annuities** or **guaranteed investment contracts (GICs)** often include embedded derivatives to meet return guarantees:
- **Dynamic Hedging**: Insurers use options or futures to hedge equity-linked guarantees. If markets crash, the leveraged nature of derivatives can lead to hedging shortfalls.
- **Capital Efficiency Pressures**: To reduce reserve requirements, insurers might use synthetic positions (e.g., swaptions) that mask leverage, increasing tail risk.
---
### **4. Counterparty Risk**
Derivatives expose insurers to leveraged counterparties (e.g., banks, hedge funds):
- **Margin Calls**: If a derivative position moves against the insurer, they may face sudden collateral demands during market stress (e.g., 2008 liquidity crunch).
- **Default Chains**: A counterparty’s collapse (e.g., Lehman Brothers) could unravel hedges, leaving insurers exposed.
---
### **5. Regulatory and Accounting Risks**
- **Solvency II/NAIC Rules**: Regulations limit explicit leverage but may not fully capture synthetic leverage in derivatives. Insurers might underreport risk exposure.
- **Mark-to-Market Volatility**: Leveraged derivatives can cause earnings and capital ratios to swing wildly, affecting credit ratings and investor confidence.
---
### **Historical Example: AIG and CDS (2008 Crisis)**
AIG’s massive sale of credit default swaps (CDS) on mortgage-backed securities exemplified synthetic leverage:
- **Mechanism**: AIG collected premiums for insuring $500+ billion in assets with minimal reserves.
- **Risk Realized**: When housing markets collapsed, AIG faced margin calls it couldn’t meet, requiring a $180B government bailout.
- **Lesson**: Synthetic leverage in derivatives can create catastrophic, systemic risk.
- **Asset-Liability Mismatch**: Leveraged positions may not align with long-term liabilities.
- **Reputation and Solvency**: Losses from synthetic leverage can erode policyholder trust and capital buffers.
---
### **Mitigation Strategies**
1. **Stress Testing**: Model extreme scenarios to assess leveraged derivative exposures.
2. **Collateral Management**: Maintain liquidity buffers for margin calls.
3. **Transparency**: Disclose synthetic leverage in financial reporting.
4. **Regulatory Compliance**: Align derivative use with capital adequacy frameworks (e.g., Solvency II).
---
### **Conclusion**
Global private insurers face synthetic leverage risks primarily through derivatives in investments, hedging, and product design. While these tools enhance returns or manage risks, their leveraged nature can amplify losses during crises. Vigilant risk management, regulatory oversight, and transparency are critical to avoiding systemic blowups like AIG’s 2008 collapse.
As of 2023, **U.S. insurance companies' exposure to synthetic leverage via derivatives** is significant but tightly regulated. However, precise real-time data is challenging to aggregate due to the fragmented nature of regulatory filings and proprietary disclosures. Below is a synthesis of available data, trends, and regulatory insights:
---
### **1. Key Sources of Data**
- **NAIC Filings**: U.S. insurers report derivatives usage to the National Association of Insurance Commissioners (NAIC). The **Schedule DB** section of statutory filings details derivatives holdings.
- **Federal Insurance Office (FIO) Reports**: Periodic analyses of systemic risks, including derivatives exposure.
- **Company Disclosures**: Large insurers like **MetLife**, **Prudential**, and **AIG** disclose derivatives notional values and strategies in SEC filings (e.g., 10-Ks).
---
### **2. Current Exposure Highlights**
#### **a) Notional Value of Derivatives (2023 Estimates)**
- **Life Insurers**: Hold ~80% of insurance industry derivatives. Notional exposure exceeds **$3.5 trillion**, dominated by **interest rate swaps** (60-70%) and options/futures.
- **Property & Casualty (P&C) Insurers**: Smaller exposure (~$200 billion), focused on equity/index derivatives for hedging.
- **Health Insurers**: Minimal derivatives use.
#### **b) Synthetic Leverage Drivers**
- **Interest Rate Swaps**: Used to hedge long-term liabilities (e.g., annuities). For example, a 2022 NAIC report noted that life insurers held **$2.1 trillion** in interest rate swaps, with embedded leverage due to minimal collateral requirements.
- **Equity-Linked Products**: Variable annuities with guaranteed minimum returns (GMxB) require dynamic hedging via futures/options. Prudential’s 2023 10-K disclosed **$120 billion** in equity derivatives for this purpose.
- **Credit Derivatives**: Smaller but growing, especially in commercial mortgage-backed securities (CMBS) hedging. Notional CDS exposure for top insurers is ~$50 billion.
---
### **3. Risk Metrics**
- **Leverage Ratios**: The NAIC’s Risk-Based Capital (RBC) framework limits explicit leverage but does not fully capture synthetic leverage. For example:
- **MetLife** (2023 10-K): $560 billion in derivatives notional value vs. $65 billion in total equity (~8.6x ratio).
- **AIG** (post-2008 reforms): Reduced derivatives notional to ~$300 billion (from $2.7 trillion in 2008), but synthetic leverage persists in hedging programs.
- **Collateral Requirements**: Insurers posted **$45 billion in collateral** for derivatives in 2022 (per NAIC), exposing them to liquidity risks during market stress.
---
### **4. Recent Trends (2020–2023)**
- **Rising Interest Rates**: Insurers increased use of **interest rate swaps** to hedge against bond portfolio losses (e.g., 2022–2023 Fed hikes). This creates synthetic leverage if rates reverse sharply.
- **Equity Market Volatility**: Surge in equity derivatives for variable annuity hedging (e.g., **Lincoln National** reported a 25% YoY increase in options usage in 2023).
- **Private Equity and Alternatives**: Insurers like **Allstate** and **Berkshire Hathaway** use derivatives to gain leveraged exposure to private equity/real estate.
---
### **5. Regulatory Oversight**
- **NAIC’s Derivatives Use Plan (DUP)**: Requires insurers to justify derivatives activity as hedging or “replicating” transactions (non-speculative). However, synthetic leverage can still arise in “hedging” strategies.
- **Group-wide Supervision**: Large insurers (e.g., Prudential, MetLife) face Federal Reserve scrutiny under the **Dodd-Frank Act** for systemic risk.
- **GAAP vs. Statutory Accounting**: Differences in derivatives valuation (e.g., mark-to-market under GAAP) can mask synthetic leverage in statutory reports.
- **Risk**: A 100-bp rate move could trigger ~$4 billion in collateral calls (per stress tests).
#### **b) AIG (2023)**
- **Derivatives Notional**: $300 billion (down from pre-2008 levels).
- **Focus**: Credit default swaps (CDS) now at $12 billion, but legacy exposure remains.
---
### **7. Potential Risks**
- **Liquidity Squeezes**: Margin calls during market crashes (e.g., COVID-19 March 2020).
- **Hedging Failures**: Synthetic leverage in dynamic hedging can fail during “gap risk” (e.g., 2022 UK gilt crisis).
- **Systemic Spillovers**: Interconnectedness with banks/hedge funds via counterparty exposure.
---
### **8. Data Limitations**
- **Opacity**: Notional values ≠ economic exposure. For example, interest rate swaps are often netted.
- **Collateral Netting**: Insurers post/receive collateral, reducing net leverage but creating operational risks.
---
### **Conclusion**
U.S. insurers’ synthetic leverage via derivatives is concentrated in **interest rate swaps** (for liability hedging) and **equity derivatives** (for variable annuity guarantees). While post-2008 reforms reduced speculative risks, the sheer scale of notional derivatives (~$4 trillion industry-wide) means systemic exposure persists. Key concerns include:
- Liquidity strains from margin calls (e.g., rapid rate hikes).
- Regulatory gaps in capturing embedded leverage.
- Interconnectedness with global financial markets.
For precise metrics, NAIC’s **2023 Insurance Derivatives Report** (expected late 2024) will provide updated data, but current filings suggest insurers remain heavily exposed to synthetic leverage risks.
Yes, the Lina Khan situation is emblematic. In the desperate scramble for growth, impediments to taking on ever more risk (in an increasingly volatile world) are being stripped away. Lessons learnt from financial crisis? Not many.
Yup, been posting some videos about that topic and raging about it off and on on Mastodon. It is a recipe for a GFC on steroids. The angle I see it from is as insurers pull out of markets because certain areas are economically ruinous and continue to raise interest rates, their insurance pool shrinks. As affordability continues to shrivel, the banking sector is going to have a little bit of a problem extending loans in a market where the customer base is falling off a cliff, and where many homeowners may be forced to sell because they cannot afford insurance. If an insurance company can’t cover losses for whatever reason, all of a sudden the assets of a bank are going to go up in smoke or wash into the ocean, take your pick. The writing has been on the wall for some time:
PBS Terra is how I first stumbled on this topic. They discussed the dramatic changes in flood risk and most importantly the methodologies that have been used in the past, which relied on historical weather data, are invalid.
Past historical data is not relevant for our future conditions.
Their program relied on flood risk maps provided by nonprofit called firststeet.org. One of many organizations using more powerful modeling systems to assess risk on a county by county and even block by block basis. They provide a means for homeowners to view their flood risk. Of the more disturbing developments: many areas have seen their hundred year flood risk become 35 year flood risk or even eight.
Firststreet also generates maps for fire risk. In order to learn a little more about climate risk I highly recommend watching PBS Terra Weathered series covering this topic. Some of their newer episodes cover vulnerability and risk. The maps detailing the risks include major metropolitan areas in the US, many of them in the south.
Many of firststreet’s clients are major insurers in the US. Last year, State Farm applied for a rate increase in California, the are appeal using a clause that has to do with the financial solvency of the insurer(!)
The risk is not constrained to the United States. This is a global phenomenon. Consider the number of major damn failures that took place last year Brazil and in Africa. The floods and fire in Europe.
Infrastructure failures, ecological disasters like these are going to continue. I will point out that a good number of dams dotted it all over the world are 50 years or older . I’ll restrain myself before I begin to rage about the dramatic damage to regional hydrology these projects take mumble mumble something about Ethiopia and the Blue Nile.
One more point that I think will become even more painfully clear is that the extreme weather events are ecological disasters. Just as the Ukrainian dam that was blown apart last year was an ecological disaster as well as an economic one. Helene scoured probably billions of tons of topsoil as well as vegetation when it swept roads, bridges, and people’s property into the ocean.
I also followed your valuable link to Trevor Jackson's review - quote the last paragraph "In my more pessimistic moments, I sometimes think this is the response to climate change, this is what the responses to the diminished expectations of economic growth are going to look like: a ruthless, zero-sum struggle for the control of a shrinking pie. The billionaires have far greater resources, far better coordination, and a far better sense of their class interest than anybody else. We have fooled ourselves into thinking that the response to climate change and inequality was in some way going to be a socially egalitarian and democratically decided one, rather than a struggle for control, power, and resources." I am supposing that you, Ann Pettifor, disagree and you would promote "communities of obligation". (as I would) I am wondering if you see any way to counter this pessimist view, as part of what many of us experience is powerlessness.
Elspeth I am going to disappoint you by agreeing with Professor Jackson…He is right about this being a class war; the billionaire class declaring war on the rest of us, and winning…and we need to wake up to that…And to rebuild a “communities of obligation” on the towering castle of global wealth is going to be hard without dismantling the power of those billionaires. Wresting power from billionaire authoritarians will not be a kindly, polite process…it will be brutal and nasty..and essential to re-establish a community of obligation…i.e. making them understand their obligations….as well as ours.
I feel we really are in a time of not-knowing, so I too am mostly pessimistic and think the nihilists in the billionaire class may actually enjoy being destructive of the rest of us. In my more cheerful moments (I have many here and there) I often recall Resmaa Manekem’s brilliant understanding of great unyielding pressures. He offers a metaphor from the wrongness of slavery called ‘living in the plantation’. He said when the plantation is too strong, and direct resistance leads to destruction, it does not mean do nothing. Instead, he said: disappoint the plantation . In my understanding this does not mean ignore its demands, we sometimes, even often, have to comply (and suffer moral injury) as the plantation does not yield. What it means is disappoint its expectation that we will be diminished by enslavement. On the contrary we celebrate our humanity and creativity and open ourselves to new and alive ways of being within what space we have. Whatever the plantation is, it may die eventually from its own inconsistencies and damaging ways of functioning. If we can, we can be assertive, point these out, hasten its end, but if we cannot, our way of being, disappointing it, will exert a different kind of power, ripples will spread. Many of us will lose, die, grieve, but a kernel of hope and decency, will be there. No way can I know what that will be like!!! Your writing helps, thankyou.
Great link to Prof Trevor Jackson’s review of Martin Wolf. Our political failure to align how capitalism is practised with democratic and social values that support the structures that make a state and its institutions work - what Jackson calls “communities of obligation” - is a disgrace, and isn’t being called out
By comparison prices in $ of pump trucks & ladder (30-50 ht)
China: Pumper trucks (100,000–100,000–300,000), Ladder trucks (500,000–500,000–1 million).
Russia: Pumper trucks (150,000–150,000–400,000), Ladder trucks (600,000–600,000–1.2 million).
Seems US, makes things for huge costs, missiles, AI, bombs, guns, cars, trucks! Planes
Good luck to Trump in making America the world hub for manufacturing!
Tariffs will make America even weaker!
I want to note that I recently learned of a new term: bio regionalism from Nate ‘ excellent podcast. It is movement that is seeing revival for very obvious reasons. The focus of the movement is for communities to restore and tend their watersheds. Watersheds are regional climate management. They are the natural world’s air-conditioning and sprinkler system.
Our regional watersheds are both the key to resilience and transition from a global economy made unworkable by its own behavior.
I am a great fan of Nate Hagens website and podcast…and yes, he’s right about communities restoring, rewilding…and tending to their watersheds.
My comment is an extended howl.
By DeepSeek R1 :
Global private insurance companies are exposed to **synthetic leverage** through their investment portfolios, risk management strategies, and product offerings. Here’s a breakdown of the key channels of exposure:
---
### **1. Investment Portfolios and Derivatives**
Insurance companies invest premiums in assets (e.g., bonds, equities, alternatives) to generate returns. Synthetic leverage arises when they use derivatives to amplify exposure to these assets:
- **Futures and Options**: Insurers may use equity index futures or interest rate swaps to gain leveraged exposure to markets while committing less upfront capital. For example, a small margin deposit in futures can control a large notional value, magnifying gains or losses.
- **Structured Products**: Investments in leveraged ETFs, collateralized loan obligations (CLOs), or hedge funds that employ derivatives can introduce hidden leverage into portfolios.
- **Risk**: Market downturns or volatility can lead to outsized losses relative to capital allocated, straining liquidity or solvency.
---
### **2. Hedging Strategies**
Insurers use derivatives to hedge risks (e.g., interest rate, currency, longevity), but these strategies can inadvertently introduce leverage:
- **Interest Rate Swaps**: Used to match liabilities (e.g., long-term policies), but swaps require minimal margin upfront. A sudden rate shift could trigger large collateral calls.
- **Credit Default Swaps (CDS)**: Selling protection via CDS (as AIG did pre-2008) creates synthetic leverage—insurers collect premiums but face exponential losses if defaults spike.
- **Reinsurance Sidecars**: Derivatives-linked reinsurance structures (e.g., catastrophe bonds) can embed leverage, amplifying losses in extreme events.
---
### **3. Liability-Driven Products**
Products like **variable annuities** or **guaranteed investment contracts (GICs)** often include embedded derivatives to meet return guarantees:
- **Dynamic Hedging**: Insurers use options or futures to hedge equity-linked guarantees. If markets crash, the leveraged nature of derivatives can lead to hedging shortfalls.
- **Capital Efficiency Pressures**: To reduce reserve requirements, insurers might use synthetic positions (e.g., swaptions) that mask leverage, increasing tail risk.
---
### **4. Counterparty Risk**
Derivatives expose insurers to leveraged counterparties (e.g., banks, hedge funds):
- **Margin Calls**: If a derivative position moves against the insurer, they may face sudden collateral demands during market stress (e.g., 2008 liquidity crunch).
- **Default Chains**: A counterparty’s collapse (e.g., Lehman Brothers) could unravel hedges, leaving insurers exposed.
---
### **5. Regulatory and Accounting Risks**
- **Solvency II/NAIC Rules**: Regulations limit explicit leverage but may not fully capture synthetic leverage in derivatives. Insurers might underreport risk exposure.
- **Mark-to-Market Volatility**: Leveraged derivatives can cause earnings and capital ratios to swing wildly, affecting credit ratings and investor confidence.
---
### **Historical Example: AIG and CDS (2008 Crisis)**
AIG’s massive sale of credit default swaps (CDS) on mortgage-backed securities exemplified synthetic leverage:
- **Mechanism**: AIG collected premiums for insuring $500+ billion in assets with minimal reserves.
- **Risk Realized**: When housing markets collapsed, AIG faced margin calls it couldn’t meet, requiring a $180B government bailout.
- **Lesson**: Synthetic leverage in derivatives can create catastrophic, systemic risk.
---
### **Key Risks for Insurers**
- **Liquidity Crunch**: Leveraged derivatives may demand unexpected cash outflows (e.g., margin calls).
- **Asset-Liability Mismatch**: Leveraged positions may not align with long-term liabilities.
- **Reputation and Solvency**: Losses from synthetic leverage can erode policyholder trust and capital buffers.
---
### **Mitigation Strategies**
1. **Stress Testing**: Model extreme scenarios to assess leveraged derivative exposures.
2. **Collateral Management**: Maintain liquidity buffers for margin calls.
3. **Transparency**: Disclose synthetic leverage in financial reporting.
4. **Regulatory Compliance**: Align derivative use with capital adequacy frameworks (e.g., Solvency II).
---
### **Conclusion**
Global private insurers face synthetic leverage risks primarily through derivatives in investments, hedging, and product design. While these tools enhance returns or manage risks, their leveraged nature can amplify losses during crises. Vigilant risk management, regulatory oversight, and transparency are critical to avoiding systemic blowups like AIG’s 2008 collapse.
As of 2023, **U.S. insurance companies' exposure to synthetic leverage via derivatives** is significant but tightly regulated. However, precise real-time data is challenging to aggregate due to the fragmented nature of regulatory filings and proprietary disclosures. Below is a synthesis of available data, trends, and regulatory insights:
---
### **1. Key Sources of Data**
- **NAIC Filings**: U.S. insurers report derivatives usage to the National Association of Insurance Commissioners (NAIC). The **Schedule DB** section of statutory filings details derivatives holdings.
- **Federal Insurance Office (FIO) Reports**: Periodic analyses of systemic risks, including derivatives exposure.
- **Company Disclosures**: Large insurers like **MetLife**, **Prudential**, and **AIG** disclose derivatives notional values and strategies in SEC filings (e.g., 10-Ks).
---
### **2. Current Exposure Highlights**
#### **a) Notional Value of Derivatives (2023 Estimates)**
- **Life Insurers**: Hold ~80% of insurance industry derivatives. Notional exposure exceeds **$3.5 trillion**, dominated by **interest rate swaps** (60-70%) and options/futures.
- **Property & Casualty (P&C) Insurers**: Smaller exposure (~$200 billion), focused on equity/index derivatives for hedging.
- **Health Insurers**: Minimal derivatives use.
#### **b) Synthetic Leverage Drivers**
- **Interest Rate Swaps**: Used to hedge long-term liabilities (e.g., annuities). For example, a 2022 NAIC report noted that life insurers held **$2.1 trillion** in interest rate swaps, with embedded leverage due to minimal collateral requirements.
- **Equity-Linked Products**: Variable annuities with guaranteed minimum returns (GMxB) require dynamic hedging via futures/options. Prudential’s 2023 10-K disclosed **$120 billion** in equity derivatives for this purpose.
- **Credit Derivatives**: Smaller but growing, especially in commercial mortgage-backed securities (CMBS) hedging. Notional CDS exposure for top insurers is ~$50 billion.
---
### **3. Risk Metrics**
- **Leverage Ratios**: The NAIC’s Risk-Based Capital (RBC) framework limits explicit leverage but does not fully capture synthetic leverage. For example:
- **MetLife** (2023 10-K): $560 billion in derivatives notional value vs. $65 billion in total equity (~8.6x ratio).
- **AIG** (post-2008 reforms): Reduced derivatives notional to ~$300 billion (from $2.7 trillion in 2008), but synthetic leverage persists in hedging programs.
- **Collateral Requirements**: Insurers posted **$45 billion in collateral** for derivatives in 2022 (per NAIC), exposing them to liquidity risks during market stress.
---
### **4. Recent Trends (2020–2023)**
- **Rising Interest Rates**: Insurers increased use of **interest rate swaps** to hedge against bond portfolio losses (e.g., 2022–2023 Fed hikes). This creates synthetic leverage if rates reverse sharply.
- **Equity Market Volatility**: Surge in equity derivatives for variable annuity hedging (e.g., **Lincoln National** reported a 25% YoY increase in options usage in 2023).
- **Private Equity and Alternatives**: Insurers like **Allstate** and **Berkshire Hathaway** use derivatives to gain leveraged exposure to private equity/real estate.
---
### **5. Regulatory Oversight**
- **NAIC’s Derivatives Use Plan (DUP)**: Requires insurers to justify derivatives activity as hedging or “replicating” transactions (non-speculative). However, synthetic leverage can still arise in “hedging” strategies.
- **Group-wide Supervision**: Large insurers (e.g., Prudential, MetLife) face Federal Reserve scrutiny under the **Dodd-Frank Act** for systemic risk.
- **GAAP vs. Statutory Accounting**: Differences in derivatives valuation (e.g., mark-to-market under GAAP) can mask synthetic leverage in statutory reports.
---
### **6. Case Studies**
#### **a) MetLife (2023)**
- **Derivatives Notional**: $560 billion (mostly interest rate swaps).
- **Risk**: A 100-bp rate move could trigger ~$4 billion in collateral calls (per stress tests).
#### **b) AIG (2023)**
- **Derivatives Notional**: $300 billion (down from pre-2008 levels).
- **Focus**: Credit default swaps (CDS) now at $12 billion, but legacy exposure remains.
---
### **7. Potential Risks**
- **Liquidity Squeezes**: Margin calls during market crashes (e.g., COVID-19 March 2020).
- **Hedging Failures**: Synthetic leverage in dynamic hedging can fail during “gap risk” (e.g., 2022 UK gilt crisis).
- **Systemic Spillovers**: Interconnectedness with banks/hedge funds via counterparty exposure.
---
### **8. Data Limitations**
- **Opacity**: Notional values ≠ economic exposure. For example, interest rate swaps are often netted.
- **Collateral Netting**: Insurers post/receive collateral, reducing net leverage but creating operational risks.
---
### **Conclusion**
U.S. insurers’ synthetic leverage via derivatives is concentrated in **interest rate swaps** (for liability hedging) and **equity derivatives** (for variable annuity guarantees). While post-2008 reforms reduced speculative risks, the sheer scale of notional derivatives (~$4 trillion industry-wide) means systemic exposure persists. Key concerns include:
- Liquidity strains from margin calls (e.g., rapid rate hikes).
- Regulatory gaps in capturing embedded leverage.
- Interconnectedness with global financial markets.
For precise metrics, NAIC’s **2023 Insurance Derivatives Report** (expected late 2024) will provide updated data, but current filings suggest insurers remain heavily exposed to synthetic leverage risks.
Yes, the Lina Khan situation is emblematic. In the desperate scramble for growth, impediments to taking on ever more risk (in an increasingly volatile world) are being stripped away. Lessons learnt from financial crisis? Not many.
Yup, been posting some videos about that topic and raging about it off and on on Mastodon. It is a recipe for a GFC on steroids. The angle I see it from is as insurers pull out of markets because certain areas are economically ruinous and continue to raise interest rates, their insurance pool shrinks. As affordability continues to shrivel, the banking sector is going to have a little bit of a problem extending loans in a market where the customer base is falling off a cliff, and where many homeowners may be forced to sell because they cannot afford insurance. If an insurance company can’t cover losses for whatever reason, all of a sudden the assets of a bank are going to go up in smoke or wash into the ocean, take your pick. The writing has been on the wall for some time:
PBS Terra is how I first stumbled on this topic. They discussed the dramatic changes in flood risk and most importantly the methodologies that have been used in the past, which relied on historical weather data, are invalid.
Past historical data is not relevant for our future conditions.
Their program relied on flood risk maps provided by nonprofit called firststeet.org. One of many organizations using more powerful modeling systems to assess risk on a county by county and even block by block basis. They provide a means for homeowners to view their flood risk. Of the more disturbing developments: many areas have seen their hundred year flood risk become 35 year flood risk or even eight.
Firststreet also generates maps for fire risk. In order to learn a little more about climate risk I highly recommend watching PBS Terra Weathered series covering this topic. Some of their newer episodes cover vulnerability and risk. The maps detailing the risks include major metropolitan areas in the US, many of them in the south.
Many of firststreet’s clients are major insurers in the US. Last year, State Farm applied for a rate increase in California, the are appeal using a clause that has to do with the financial solvency of the insurer(!)
The risk is not constrained to the United States. This is a global phenomenon. Consider the number of major damn failures that took place last year Brazil and in Africa. The floods and fire in Europe.
Infrastructure failures, ecological disasters like these are going to continue. I will point out that a good number of dams dotted it all over the world are 50 years or older . I’ll restrain myself before I begin to rage about the dramatic damage to regional hydrology these projects take mumble mumble something about Ethiopia and the Blue Nile.
One more point that I think will become even more painfully clear is that the extreme weather events are ecological disasters. Just as the Ukrainian dam that was blown apart last year was an ecological disaster as well as an economic one. Helene scoured probably billions of tons of topsoil as well as vegetation when it swept roads, bridges, and people’s property into the ocean.
Wow…thanks for this excellent comment…and yes, I agree about the Ethiopian dam...
GOOD, Americans should get a taste of Gaza.
I also followed your valuable link to Trevor Jackson's review - quote the last paragraph "In my more pessimistic moments, I sometimes think this is the response to climate change, this is what the responses to the diminished expectations of economic growth are going to look like: a ruthless, zero-sum struggle for the control of a shrinking pie. The billionaires have far greater resources, far better coordination, and a far better sense of their class interest than anybody else. We have fooled ourselves into thinking that the response to climate change and inequality was in some way going to be a socially egalitarian and democratically decided one, rather than a struggle for control, power, and resources." I am supposing that you, Ann Pettifor, disagree and you would promote "communities of obligation". (as I would) I am wondering if you see any way to counter this pessimist view, as part of what many of us experience is powerlessness.
Elspeth I am going to disappoint you by agreeing with Professor Jackson…He is right about this being a class war; the billionaire class declaring war on the rest of us, and winning…and we need to wake up to that…And to rebuild a “communities of obligation” on the towering castle of global wealth is going to be hard without dismantling the power of those billionaires. Wresting power from billionaire authoritarians will not be a kindly, polite process…it will be brutal and nasty..and essential to re-establish a community of obligation…i.e. making them understand their obligations….as well as ours.
I feel we really are in a time of not-knowing, so I too am mostly pessimistic and think the nihilists in the billionaire class may actually enjoy being destructive of the rest of us. In my more cheerful moments (I have many here and there) I often recall Resmaa Manekem’s brilliant understanding of great unyielding pressures. He offers a metaphor from the wrongness of slavery called ‘living in the plantation’. He said when the plantation is too strong, and direct resistance leads to destruction, it does not mean do nothing. Instead, he said: disappoint the plantation . In my understanding this does not mean ignore its demands, we sometimes, even often, have to comply (and suffer moral injury) as the plantation does not yield. What it means is disappoint its expectation that we will be diminished by enslavement. On the contrary we celebrate our humanity and creativity and open ourselves to new and alive ways of being within what space we have. Whatever the plantation is, it may die eventually from its own inconsistencies and damaging ways of functioning. If we can, we can be assertive, point these out, hasten its end, but if we cannot, our way of being, disappointing it, will exert a different kind of power, ripples will spread. Many of us will lose, die, grieve, but a kernel of hope and decency, will be there. No way can I know what that will be like!!! Your writing helps, thankyou.