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Crisis Hits Companies Harder Than Agents

By Arthur D. Postal

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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.

“Importantly, any capital received by life insurers would be repaid,” he argues. “The CPP is not a handout. CPP would, however, provide a stimulant that would keep capital flowing while the financial markets recover.”

For agents’ part, Cliff Wilson, president of the National Association of Insurance and Financial Advisors, says, “We have been through up and down times before. But this ranks up among the top.”

He says it has been “a busy period. Customers want to know where they are; they want reassurance, want some evaluations of their portfolios.

“They need to speak to someone who is a professional and who can advise them what should be done,” Wilson says.

Michael Corry, president of the Association for Advanced Life Underwriting, says that “during troubled times, people look most to individuals and industries they can trust the most.

“The financial crisis has tried our industry and AALU members tremendously,” he says. “I believe in the long run we will come out stronger and increase the appreciation for the protection, guarantees, and sound advice we provide.”

Touching on an issue that Wilson also discussed, Corry says, “There is increasing recognition that exotic products that offer unrealistic returns are not in the public’s best interest.”

He adds, “The current circumstances will increase focus on the value that is added by high quality life insurance advisors and the sound products they provide.”

Corry voices another cautionary note. There is a slightly more than a 50% chance that the Securities and Exchange Commission could act on proposed rule 151A, which would classify some equity indexed annuities as securities and therefore subject to SEC oversight, before Chairman Chris Cox steps down by early next year.

If not, Corry says, “final action may be deferred for some time.” He notes that on Oct. 31, during a reopened comment period, AALU reinforced its original input by again urging the SEC to clarify that the proposed rules do not apply to general account life insurance policies and traditional fixed annuities which are not referenced to an equity index.

John Greene, vice president of congressional affairs for the National Association of Health Underwriters, says health insurance agents are more nervous about what will happen during the healthcare reform debate in Congress next year “than what is happening now.”

NAHU officials will be unable to measure impact of downturn on enrollment until the beginning of the year, he says. But “our association membership is holding steady. If there is any proxy as to what is happening from our agents, there is no direct impact.

“We are not hearing any significant cutbacks amongst agents or brokers,” he says. “They are voicing concern about the future, and are asking us to make that point to the policymakers.”

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