Deep Investment Losses A Major Problem Across Life Insurance Industry
Life insurers in general face a major problem, investment losses since markets imploded last year has many companies in the industry facing potential capital shortfalls. While most of them are not making major headlines like the bailout of AIG, there are some which may require federal assistance in the near future to keep afloat.
The big reason are annuities, fixed annuities have guaranteed death benefits and generally the proceeds from premiums are invested in safe vehicles like bonds. However most variable annuities are operated like mutual funds and invest in riskier vehicles like the stock market.
Unlike mutual funds, many insurers offer the option of protection of the initial principal for an extra cost. But with the stock market having fallen around 40% off it’s high from last year, for many insurers the value of their liabilities has pretty much remained constant while the value of their assets have fallen considerably.
Many life insurers underestimated their levels of risk and while maybe not of the scope of AIG’s mammoth derivative losses it is still a major problem for the industry in general. Many companies face credit downgrades and have seen their stock prices take a beating.
While many companies would like to raise premiums to compensate somewhat, many state regulators have taken a hard line against price increases during the current economic climate. The longer the recession drags out, the more likely an industry wide solution may be required.
