Insurance Quotes & Advice

A report released yesterday by A.M. Best, a leading credit rating agency, casts concerns about the claims paying ability of insurers, due the credit crisis embroiling the nation’s financial markets.

Investors are showing a limited appetite for capital-market offerings designed to raise cash for claims payments, Best said.  In addition, insurers’ exposure in hurricane-prone states to properties foreclosed and abandoned as a result of the subprime mortgage crisis has come under review.

More than 500,000 properties in coastal areas from Maine to Texas have been foreclosed on due to the subprime mortgage crisis. Florida alone has more than 100,000 properties currently subject to foreclosure.  The report says insurers may not realize the extent to which their books of business are exposed to foreclosed properties.

Weather forecasters are predicting an above average hurricane season that kicks off in less than two weeks.  If a major hurricane were to strike the U.S. this year, the results could be devastating to the entire industry and to the property insurance sector especially.

The industry has already been hit hard by the subprime collapse, with losses to date exceeding the amount paid out in claims after Hurricane Katrina.  With the current financial crisis far from over, the final total has yet to be tallied.

The current instability in the stock market also has many analysts predicting a weak outlook on the industry’s future investment income which make up the bulk of their profits.  Homeowners may see rates rise in the near future even without a major catastrophe occurring.

The meltdown of credit markets has led to calls for increased regulation of the financial services sector including the insurance industry.  With estimates that losses will approach the $1 trillion mark, which some feel is still too conservative, it provides a powerful weapon for Congress to force change onto the system.

The battles lines are being drawn as states fight the attempt to impose federal oversight of what has been their regulatory domain for over a century.

“The state-based regulatory regime has been very effective for more than 150 years,” Dinallo said. “Insurance oversight has been rigorous, resulting in high regulatory compliance and avoiding the level of insolvencies and market meltdowns we have seen in other sectors of the U.S. financial community. Indeed, our national solvency system has ensured that companies have the wherewithal to pay claims while remaining competitive and profitable.”

While the insurance industry has had some setbacks during this financial crisis, it is faring much better than commercial banks and securities firms, both of which are currently regulated at the federal level.

Much of the blame for the current credit crisis can be laid at the feet of the federal government, which has been deregulating the financial services sector for years.  It was under their watch that the current financial troubles came about.  In fact, the largely unregulated $500 trillion derivatives market still remains a “Sword of Damocles” hanging over the entire financial sector. 

Would the federal government do a better job this time with insurance?  I’m not so sure that shifting regulatory control out state’s hands would be in the best interest to consumers.  While the current system of state regulation may be highly inefficient, I would not call it under regulated by any means. 

The trouble with the bond insurance industry has raised the cost for issuing debt for many local and state governments.  Municipal bond yields have been climbing recently as bonds backed by troubled insurers face the lingering threat of a ratings downgrade.

What was once a stable and profitable niche in the financial sector, the bond insurance industry has been hit hard by the sub prime collapse.  With defaults expected to continue in the foreseeable future, the decision to insure mortgage backed debt has left them exposed to losses many analysts fear they will be unable to meet. 

Many states are now railing against the double standards for credit ratings between corporate and municipal debt that force them to purchase bond insurance or pay higher interest rates even though historically they have a much lower default rate.  The nation’s largest issuer of municipal debt, California, has decided to stop purchasing bond insurance all together and is considering forming their own bond insurer backed by the state’s pension fund.

A coalition of state treasurers have started putting pressure on ratings agencies to use a single scale system.  If that were to happen, every state except for Louisiana whose economy was devastated by Hurricane Katrina would most likely receive a “AAA” rating and obviate the need for bond insurance.