Difficult Times Ahead For Insurers
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.
