Insurance Quotes & Advice

Insurers were hit hard in 2008 in both in their underwriting business and investment portfolio’s.  Insured losses for catastrophe’s rose 7% this year according to Guy Carpenter Co., LLC, a leading reinsurance specialist.

“The record-setting Atlantic hurricane season — especially Ike and Gustav — is the big story and the primary driver of insured losses in 2008,” said Chris Klein, Global Head of Business Intelligence, Guy Carpenter. “At the same time, one should not overlook the role that other events, such as the China earthquake, California wildfires, and man-made catastrophes, played in making this an especially active year.”

The major insurance sub plot this year has been the spectacular losses by AIG and the record setting bailout that helped it avoid bankruptcy.  A number of insurers have also purchased small regional banks in recent months in order to qualify for federal funding from TARP, the agency in charge of dispersing the $700 billion financial rescue package approved by Congress back in October.

Next year looks to be difficult as well for the insurance industry with Standard & Poors setting a number of sectors to a negative outlook for 2009.  The nearly 40% decline in stock markets from their highs has put a big dent in the industry’s normally robust profits from investment income.

Despite the big drop in investment income, for the most part much of the insurance industry’s capital reserves are relatively safe, tied up mostly in investment grade bonds.  The caveat though is that there are a few companies that still have significant holdings in mortgage backed securities purchased before their credit ratings plunged in the wake of the sub prime collapse.

Another consideration is that as the economy continues to worsen, losses from credit derivatives will continue to grow.  These credit default swaps are major headache for the entire financial services industry, while they seemed like easy money during good economic times, the highly leveraged position have opened them up to potentially huge losses.

It is not out of the realm of possibility that the insurance industry will require it’s own form of bailout like the banking industry.

The Federal Trade Commission(FTC) has ordered nine major insurance companies to provide information on their use of credit based scoring in determining home insurance premiums.  The use of credit based scoring has been controversial, many consumer advocacy groups feel that it unfairly profiles certain racial groups.

The orders require information from the nine largest private providers of homeowners insurance, which have roughly 60 percent of the homeowners insurance market in the U.S.: State Farm Mutual Automobile Insurance Company, The Allstate Corporation, Fire Insurance Exchange, Nationwide Mutual Insurance Company, The Travelers Companies, Inc., United Services Automobile Association, Liberty Mutual Holding Company, Inc., The Chubb Corporation, and American Family Mutual Insurance Company.

Credit based scoring has been mainly used by the auto and property insurance sectors.  A number of states have attempted to ban it’s use over the years but insurers have vehemently opposed them.

Florida’s state regulator was one of the leading figures against credit scoring when Congressional hearings were held on the matter back in May.  The last study by the FTC was convened in 2003 and was completed last year,  it found that credit based scoring was an accurate measure to determine risk.

Needless to say that finding was slammed by a number of groups.  There is a lot of evidence that credit scoring may be an accurate measure of risk but there is also a lot of evidence that certain groups are disproportionately affected.

According to Standard & Poors Rating Services, a number of insurance sectors face a negative outlook for 2009.  The decline of the stock market over the past year has put a major dent in the industry’s usually strong investment income.

A recently published S&P report, “For North American Insurers, Strong Risk Management And Capital Adequacy Are Key Defenses Against Recession,” says that insurers have always needed to be mindful of their capital-management strategies, the pricing of their products, and risks in the equity and credit markets that can affect their business profiles, portfolios, profits, and ultimately, ratings. But it points out this is even truer in a recession, when missteps that might have only minor repercussions in sunnier times could now have harsher consequences.

A number of insurers have also acquired small banks in recent weeks in the hopes that they can acquire funds from TARP, the agency in charge of disbursing the $700 billion financial rescue package.  Insurers by no means face the same capital deficiencies of their banking brethren but there is cause for concern.

With the U.S. facing a lengthy recession it is especially disturbing that premium prices continue to fall.   AIG already the recipient of a government loan is the leading force behind the recent rate cuts to the chagrin of their competitors.

Insurers should have enough capital to meet payout obligations for the upcoming year but their margin of safety is much smaller than in the past.  2008 saw a number of significant payout events from a busy Atlantic hurricane season.

Insurers will also face the specter of regulatory changes as the federal government is expected to reform the financial services industry in the upcoming future.  This will likely end up being a positive for the industry in the long run because of the inefficiencies in dealing with fifty separate state insurance commissioners.

The industry faces many hurdles in the upcoming year but it remains to be seen if they will require their own bailout.