Insurance Quotes & Advice

The Senate Banking Committee held more hearings this week for the creation of an Optional Federal Charter(OFC).  It is unlikely any kind of legislative action will take place before the current Congressional session ends but the current hearings could lay the groundwork for future regulatory policy decisions.

The ongoing breakdown of the financial services sector over the past year has opened the door for the sweeping regulatory reform movement in Washington.  It should be noted that the insurance industry is no where near the condition of their financial brethren in commercial and investment banking sectors.

Don’t get me wrong, the insurance industry has taken it’s fair share of lumps during the current economic downturn, with losses outpacing the payments made in the aftermath of Hurricane Katrina.  That being said, there’s no government bailout being drawn up for the insurance industry and it’s not like the Fed has had to open up the discount window for them like it did for investment banking firms.

Let’s face it, the economy is in the dumps for the time being and with the stock market struggling it’s going to adversely affect of the bottom line for the insurance industry for some time.  However, that’s because the industry holds a substantial amount of capital, most of it held as investments, in order to meet the potential liabilities from claims that can arise at any given time.

The is no question the commercial and investment banking sectors are definitely in need of more stringent regulatory controls.  The OFC on the other hand would give insurance companies the option for less regulation than they currently have with the current state system.

There’s a reason why the insurance industry hasn’t gone down the drain like the rest of the financial services sector.  It’s quite obvious that states have done a much better job than the federal government at policing the excessive risk taking that has been standard practice since firms conveniently forgot the hard lessons from the Savings & Loan debacle.

Many clients of the bond insurance industry had interest payments skyrocket earlier this year when the auction rate securities market failed.  When many of the bigger names in the industry like Ambac and MBIA lost their top credit ratings, their clients paid the price when demand for bonds that lost their AAA status evaporated.

For years municipalities have been forced to purchase bond insurance due to the dual credit rating system between them and corporate entities.  Despite municipal bonds having a stellar history of low default rates, very few communities earned AAA status so it was just cheaper to purchase bond insurance and get lower borrowing costs.

Most communities were for the most part content with this arrangement until insurers started insuring high risk residential mortgages bundled into Collateralized Debt Obligations(CDOs) and put AAA rated municipal bonds in jeopardy as well.  State and local governments had to pay hundreds of millions in higher interest costs and now many of them are filing lawsuits against the insurers as well as the investment banks that normally purchase bond issues if an auction is in danger of failing.

Lately there has been a strong push from many different sides to abolish the dual rating system and things seem to be moving in that direction.  Ratings agencies are also facing their own intense scrutiny for rating these high risk CDOs as investment grade in the first place.

Let’s face it a lot of companies are going to get sued over this whole fiasco.  When your interest rates shoot over 20% through no fault of your own, you’re taking somebody to court.

Last year at around this time the price of oil was at around $60 a barrel.  While the price of gas hasn’t climbed to the same relative levels as oil, drivers are definitely starting to feel the pinch in their wallets.

The fact is though, many Americans are driving less these days and auto insurers should see a benefit from fewer accidents and thus fewer claims.  Auto insurers are no different from the rest of the insurance industry and are seeing a large drop off in investment profits  from the general decline in financial markets.

In the short term they should see a jump in underwriting income until premiums readjust themselves through competitive market forces.  Something that drivers may look forward to in the next few years is a possible industry move to a usage based premium pricing model.

The current pricing model relies on a number of variables, including gender, age, credit history, and marital status—all of which are predictive but not definitive. Usage-based insurance, on the other hand, uses driving data with which insurers can determine more accurate rates and encourage insureds to control these rates. For example, if a customer drives less, travels at reasonable speeds, brakes and accelerates gradually, and generally practices safe driving behavior, those habits can help lower his rates.

Most drivers would probably welcome this change as it would be more palatable than let’s say the use of credit scores in determining premium rates.  The big question is whether insurers will be able to obtain the needed driving data on a consistent basis.

It is doubtful if this push for this new pricing model would have come about this soon if energy prices stayed at last year’s level.  If driving remains constrained though, one can easily see at least one insurer switching to this model in order to gain market share and then drivers may start benefiting as well.