In this post:
you are claiming that reinsurance gives insurance companies some special ability to meet their obligations even in the face of "financial crisis" and "bond defaults" that regular bond issuers don't have.
I disagreed. Other than posting a sales piece from TransRe, you haven't responded to my point that reinsurance is just one more asset that rating companies consider when they rate insurance companies.
I see that you are still obsessed with rating. As I said, it's a historical reference, and neither is rating as reliable as we hoped it is. As the subprime crisis reveals, some CDOs rated highly sank.
In
retirement planning, which is what we are discussing about, the
certainty of one getting his retirement income for as long as he lives is the primary concern here. And, by commenting that having some annuities to insure one's ability to have a survival income level throughout retirement, instead of putting everything into a balanced portfolio of bonds and stocks, I am making a comparison. To be specific, it's a comparison of:
(A) Solely bonds and stocks vs (B) Annuities plus bonds and stocks.
Do note that I am not even comparing the yield or estate for your children. I am talking about:
1) Retirement income;
2) that is sustainable for as long as one lives through his retirement
3) for survival
4) which is
more (
relatively) certain
And in this relative comparison, it's apparent that if part of (B) :
1) must meet more financial regulations imposed by insurance regulators in terms of how the assets are to be invested; and
2) has an additional layer of risk protection by insurance
whereas (A) (the stocks and bonds of the companies in the majority of industries that do not have the above 2 restrictions) has none of the above (2) protection,
it is
relatively more
certain to be able to meet the above
4 criteria of retirement income planning.
Please note that I had
never suggested things like:
Insurance companies can
never fail to honor their obligations (even though they are regulated and reinsured, and even though they are located in relatively safe financial centers like Switzerland and Singapore).
I hope I'd explained myself clearly.
I see that in your last post you shifted from "reinsurance makes insurance companies special" to "statutory regulation makes insurance companies special". I'm taking that as an indication that you realized that reinsurance doesn't provide insurers any unique ability to weather general economic downturns.
Again, it's a relative comparison. I had acknowledged that government bonds are theoretically risk-free (including the CPI-linked ones which I shall touch on later). But the risk-free return is relatively low, so for a balanced fund used to generate the 4% SWR, only a limited amount can be allocated to this risk-free base, so that a higher return may be expected.
So this would mean including bonds from corporates (eg BB or higher rated companies), plus stocks of a variety of companies including Big-cap, small-cap, US, emerging markets, commodities, etc (eg as suggested by authors of books on early retirement, which form a balanced portfolio).
Now, having explained the frame of reference we are using, it's quite easy to explain my point about
relative certainty of sustainable survival income (CSSI):
If you were to compare (A) balanced portfolio mentioned above
without the
2 layers of assurance for insurers and (B) a portfolio of annuities
with the
2 layers of assurance, it's clear that (B) meets the criteria of CSSI better.
Now, but I had not stopped at this point. I am suggesting only to invest what you need to survive---what you cannot risk losing because you'd die without it---on this Insured Income Stream, simply because even smart guys question the 4% SWR. So, can we take chances for this amount of money? Not too much. So, Insured Income stream consisting of a portfolio of annuities diversified across different major currencies, financial centers and strong insurance companies is a better option than the pure (and questionable) SWR portfolio for the above explained reasons using comparisons. But it's still not risk-free, because only government bonds such as the CPI linked can be theoretically risk-free. And, I am going to move on to your next point to explain why, despite the fact that such an annuities portfolio is not 100% risk-free, I'd still choose it rather than CP linked bonds. This is my personal opinion.
I'm glad to see that you recommend diversifying the annuities across multiple companies. I'm disappointed that you didn't mention the possiblity of using US CPI-linked annuities for people who plan live in the US.
(I think brewer did a good job in post #118 of talking about insurance company safety, including statutory regulation. I won't try to add anything to that.)
Yes, CPI linked bonds would be good to counter inflation. But the problems, in my opinion, have to do with:
1) The USD denomination (I am not aware if Swiss, British, Singaporean, Norwegian, Canadian, Australian, etc governments also issue inflation-linked bonds. I am aware of US government-issued ones though. Maybe those who know could tell us also.)
2) less returns especially for older people who can get much more payouts from annuities.
So, if we were to compare using (a) only CPI-linked bonds vs (b) annuities portfolio, then (a) has only 1 major advantage, and that is it
being risk-free. But (b) has 2 advantages: (1) opportunities to diversify across currencies ; (2) higher payouts. The advantages of (a) over (b), in my opinion, can be compensated by these 2 factors and the fact that by using the diversification method as described, the risk of all the 6 insurers being made bankrupt in our lifetime is minimal. I'd need much more money if I wanted to use the risk-free CPI bonds to provide the
CSSI , and in my case I intend to live outside US, and I do expect the USD to depreciate in the long term due to its deficits, so a USD-denominated CPI linked bond may not be ideal in my case.
If everybody starts to live beyond the assumed mortality, the insurance company may run into trouble. Still, as explained, certainty of survival income is important, so it's still better to have some certainty contractually rather than to worry about what's not happened and that's not in the contract.
