The catastrophic economic events of the last half of 2008 appear to have had a greater impact on life insurance companies than agents. Interviews by National Underwriter also found that the health insurance industry has been less affected, although it is difficult to measure the full impact of the downturn until open enrollment closes at the end of the year.
Interviews found that insurance carriers were innocent bystanders blindsided by the downturn–especially how quickly it impacted their balance sheets and stock prices.
“Insurance companies were not at the heart of the current financial turmoil,” says Paul Newsome, managing director for insurance at Sandler O’Neill in Chicago.
“There are going to be some exceptions, those companies who overly invested in high-risk asset classes and who are excessively leveraged, but that is the exception rather than the rule,” he says.
The most important thing is that “everyone was surprised at how quickly it happened,” Newsome says, adding that “few insurers understood the depth of poor underwriting of loans and the extent to which bad loans were securitized over and over again.”
He says he was not surprised that subprime loans were affected, but “did not expect other asset classes to be so hit hard by this.”
Newsome says insurers are involved in the current turmoil largely as buyers of fixed income securities that are the heart of life insurance industry assets.
As to how they might have prevented the severe downturn in their ratings and stock prices, he says that in retrospect, insurers “could have done better diligence, could have questioned rating agencies.”
Regarding the Treasury Department’s Troubled Asset Relief Program, Newsome says it will be a tough sell for insurers to get funds from the Capital Purchase Program.
“A lot of it depends on how things develop, but I perceive reluctance within Treasury to provide aid,” he says, adding that it is a sensitive political issue to bail out insurers.
“Politically, insurers struggle with their support because they are state regulated, and have horrible reputations within the general population,” he says. “It is an institution that does not generate much sympathy from the public.”
But Gary Hughes, executive vice president and general counsel, of the American Council of Life Insurers, which has been lobbying for TARP aid for insurers, says, “Because of the financial crisis and uncertainties in the market, life insurers are protecting capital and, among other things, avoiding the corporate bond market.
“Extending the Capital Purchase Program to all life insurers, and not just those that control banks or thrifts, would give them the confidence they need to return to their role as the credit arm of corporate America,” Hughes says.