Insurance Quotes & Advice

The bond insurance industry’s decision to insure the residential mortgage market has come back to haunt them and has not only caused them huge losses but could also cost them their most profitable source of income.  The decision by Moody’s Investor Service this week to rate municipal bonds by the same standards as their corporate counterparts could signal the end of the municipal bond insurance era. 

The change threatens to accelerate a drop in demand for bond insurance, which began when losses related to subprime mortgage debt resulted in MBIA, Ambac and at least three other companies losing their top credit ratings this year. Only 24.7 percent of municipal debt offerings sold this year were insured, down from 49.1 percent in the same period last year, according to a Lehman Brothers Holdings Inc. report.

Growing pressure on ratings agencies from public officials across the country, heavily influenced this decision.  When the auction rate bond market collapsed due to investors’ mistrust of insurers, borrowing cost skyrocketed for many communities through no fault of their own.

The municipal bond market was the golden goose of the bond insurance industry and for years made up the bulk of it’s profits.  With low default rates, the income from this market was pretty much risk free, unlike mortgage backed securities and other collaterized debt obligations. 

This was the reason Warren Buffet decided to enter the market back in February and offered to reinsure $800 billion in municipal bonds from troubled insurers.   However, if most municipalities get upgraded to a AAA rating as expected, there will be little need for his new subsidiary despite the sterling reputation he brings to the table.

State insurance commissioners testified before Congress saying they were willing to support an Office of Insurance Information(OII).  The proposed legislation would be called the Insurance Information Act of 2008 and would give the OII, which operate under the Treasury Department, the power to establish federal guidelines over international insurance policy.

State insurance regulators support the bill’s objectives of allowing a federal agency to work with state insurance regulators to receive and analyze industry data; and establishing a central point of contact in the federal government for foreign governments regarding international insurance matters.

“While state insurance regulators wholeheartedly support and actively engage in efforts to help U.S. insurers compete globally, we oppose and caution against any legislation with a broadly preemptive approach,” McRaith said. “State regulators would object to the OII or any other federal entity having the authority to preempt consumer protections and solvency standards adopted by the states.”

State regulators still believe that regulatory powers should be left in their hands as they are better suited to protect consumers.  The recent troubles in the credit markets have re-ignited the debate between federal and state governments concerning oversight for the financial services sector including insurance.

Some officials in the federal government have been openly critical of the current state regulatory system calling it cumbersome and inefficient, that it restricts global opportunities for the nations’s insurance companies.  State regulators fired backed quickly, blaming the recent financial meltdown on years of deregulation instituted by the federal government.

The OII would give the it’s international counterparts a single office to enter agreements into, without having to interact with fifty different state insurance commissioners.  How this will work in reality remains to be seen.  It could be quite disconcerting to foreign governments, if a single dissenting state government could have to the power to nullify an international insurance agreement. 

A number of insurers are cutting back on their wind coverage in states along the Gulf Coast.  Most recently, State Farm announced that it wouldn’t renew coverage for residents in Mississippi that live within 1,000 feet of the water.

Insurers are trying to reduce their potential liability in hurricane prone areas.  As the aftermath of Hurricane Katrina showed,  juries were more likely to side with homeowners in legal battles with insurers over the wind vs. water issue.

This leaves many residents in coastal regions with a gap in their coverage, as is the case with flood damage.  While the federal government offers flood insurance, the Senate resisted efforts to include wind damage coverage while voting to renew to National Flood Insurance Program that was set to expire on September 1st.

With many state regulators fighting attempts to raise already high rates in coastal states, insurance companies are finding it a losing proposition if a major storm hits.  If the private market coverage for wind damage dries up further, Congress may have to revisit the issue despite the increased cost it would place on the program.

Congress is already considering a nationalizing catastrophe reinsurance, which would help lower premiums for high risk residents but that would only shift the cost to the rest of the public.