Insurance Quotes & Advice

Most industry experts are of the belief that public backlash over AIG’s modified bailout and subsequent scandal over executive compensation has pretty much killed any hopes other insurers have of getting access to government funds from the Troubled Asset Relief Program(TARP).  Life insurers are especially struggling as variable annuities tied to stock market performance as well as their own investments have lost considerable value over the past year.

A number of insurers had purchased small regional banks in the hopes of gaining eligibility to TARP based on statements from former Treasury Secretary Henry Paulson but as of yet no insurer has received any funds from the program and the prospects are looking increasingly remote.  As is the case with their banking counterparts, the number of insurers that will go insolvent in the next few years is expected to rise considerably.

We probably would have seen even more insurers attempt to purchase banks were it not for the fact that it would then place them under the capital requirements as well as the regulatory eye of the FDIC.  What we saw then were those insurers that basically knew they were going to need some sort of government assistance down the road put themselves in that position, however, it hasn’t exactly worked out the way they planned.

For the most part it seems as if a company doesn’t pose a significant systemic risk to the economy, then they are pretty much on their own from now on.  Unfortunately this has many customers worried about the financial security of their policies and annuities.

While all states offer some form of guarantee protection, like the FDIC does for banks, there are many more people with insurance policies and annuities over the limit than is the case with deposits.  Most people expect stability from their insurer and the recent market disruptions has tarnished the reputation for some companies that have been in existence for over a hundred years and has many people wondering if some them will even make it into the next decade.

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.

A number of insurance companies have purchased banks in recent months in order to gain access TARP funds.  Albeit not on the scale of their financial brethren, the insurance industry has also struggled during the financial crisis and has seen it’s largest company, AIG, require massive federal aid in order to avoid bankruptcy.

Two life insurance companies, the Hartford and Lincoln National received approval last month to convert into bank holding companies, paving the way for them to be eligible for federal aid.  Troubled bond insurers, Ambac and MBIA have also applied to the government for capital injections in recent months.

Giving aid to bond insurers would help out the municipal bond sector, which has been in upheaval for the past year ever since a number of the major players received credit downgrades.  A number of critics have complained that this would purport the original intention of TARP in the first place.

Some have called for the insurance industry to receive their own sort of bailout program as TARP was set to originally help re-capitalize the banking system.  While the insurance industry is a part of the financial services sector, helping them out will do little to help unfreeze credit markets. 

With only $350 billion remaining, not many people believe that will be enough to help both the banking system and the insurance industry.