Insurance Quotes & Advice

The past two decades have seen the lines blurred between insurance, commercial and investment banking.  The current financial crisis has seen the end to independent investment banking firms but it may also see a number of insurance units split off from larger financial conglomerates.

The sale of Wachovia to Citigroup will only include it’s banking services and leave it’s insurance unit as a stand alone entity.  It remains to be seen how the insurance unit will fare on it’s own but there is the fact that it will no longer be held down by the troubled mortgage assets from the parent bank holding company.

Wachovia Insurance Services is not included in the deal, according to Vince Scanlon, a spokesperson for Wachovia. Wachovia Insurance Services employs 1,300 people in 34 offices in 15 states and Washington D.C.

We have seen some consolidation in the insurance industry as was the case when Liberty Mutual acquired Safeco.  However the fact that Standard & Poors lowered their credit rating after a review of the acquisition may make firms second guess acquiring some of their weaker brethren.

At a time when capital is difficult to obtain, any downgrade of credit is not something companies will enter into lightly.  It is a different story in commercial banking because when acquiring another bank, the buyer also acquires that bank’s deposit base.

As was the case with Wachovia, because a number of large banks already have their own insurance units, it is quite possible that further consolidation in commercial banking could lead to a number of independent insurance units when it is all said and done.

This could very well lead to a stronger insurance industry overall in the end as they tend to fare better in economic downturns relative to other financial service sectors.

Just days before the National Flood Insurance Program(NFIP) was set to expire, the Senate approved the extension that the House had passed earlier.  This unfortunate yet expected outcome is the result of months of disagreement between the House and Senate over competing bills to re-institute the program.

The House and Senate had failed to come to terms on the details of a longer term extension earlier in the session. Among the dividing issues are whether to add wind coverage to the flood program and whether to forgive NFIP’s debt. This 6-month measure buys lawmakers time until next March to iron out those differences.

The problem of finding a long term agreement now falls to the next congressional session.  However with the government hemorrhaging money to deal with the financial crisis at a potential cost of nearly $2 trillion, it is quite possible that the next Congress may not have the will to add significant costs to the existing program and balloon the budget deficit further.

That could spell doom for the possible inclusion of wind coverage which has been highly controversial due to the expected price tag.  However at a time when property insurers are beginning to cut back on wind coverage, a public source for coverage may be more necessary than ever.

But then again this is Congress we are talking about, they have been profligate spenders in the past, so it is not out of the realm of possibility that they both add wind coverage and forgive the NFIP’s debt the next time they meet.

Mortgage insurers haven’t been immune to losses stemming from the subprime collapse, far from it in fact.  They, like their counterparts in the bond insurance industry are also facing another round of credit downgrades, overall it has been a pretty rough year.

However, unlike bond insurers, they can look forward to an increase in demand for their services.  With lending institutions tight with credit these days, potential home buyers are finding it difficult to procure “piggy back” mortgages.

A typical mortgage requires a 20% down payment but when a buyer falls short of that mark the standard practice over the past few years has been for the buyer to seek out a smaller second mortgage at a higher interest rate to make up the difference.  With it becoming much harder to find a “piggy back” mortgage, potential buyers are increasingly turning to Private Mortgage Insurance(PMI) as an alternative.

For many years PMI was at a disadvantage until Congress added a provision to the IRS tax laws to make PMI interest payments tax deductible as was the case with mortgage interest payments.

It may take awhile for the industry to become profitable again as they will be susceptible to losses from bad mortgages that were given out in the past few years.  The higher demand though gives them the luxury of being able to tighten their standards considerably without an appreciable loss of business.