Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

A Critique of Monetarist and Keynesian Theories 591expectations. Thus life insurance companies tend to underestimatetheir assets, overestimate their liabilities, and reach ahigh level of static and dynamic solvency which makes themimmune to the deepest stages of the recessions that recur witheconomic cycles. In fact when the value of financial assets andcapital goods plunges in the most serious stages of recessionin every cycle, life insurance companies are not usuallyaffected, given the reduced book value they record for theirinvestments. With respect to the amount of their liabilities,insurers calculate their mathematical reserves at interest ratesmuch lower than those actually charged in the market. Hencethey tend to overestimate the present value of their commitmentson the liabilities side. Moreover policyholders takeadvantage of the profits insurance companies bring in, as longas the profits are distributed a posteriori, in accordance withthe above-mentioned profit-sharing clauses. Logically theamounts of such profits cannot be guaranteed a priori in thecorresponding contracts. 105SURRENDER VALUES AND THE MONEY SUPPLYLife insurance contracts commonly offer an option bywhich the company, at the request of the policyholder, redeemsthe policy via the payment of a certain sum in cash. This105 We have attempted elsewhere to integrate the Austrian theory of economiccycles with an explanation of insurance techniques and haveexplained how insurance methods have spontaneously evolved tocounter the harmful effects of recessions. At the same time, insurancecompanies have striven to constantly guarantee the fulfillment of theircommitments to their customers (widows, orphans, and retired people).We conclude that this approach, which has been consistently successful,should be adopted with respect to uninsured “pension funds” as well,if we expect them to accomplish their purpose and be as immune as possibleto the damaging consequences of the cycle. See our article,“Interés, ciclos económicos y planes de pensiones,” published in theAnales del Congreso Internacional de Fondos de Pensiones, which took placein Madrid in April 1984, pp. 458–68. Jesús Huerta Peña has studied theessential principles behind the financial stability of life insurance companiesin his book, La estabilidad financiera de las empresas de seguros(Madrid, 1954).