Insurers Not Sweating Market Turmoil

After downgrading U.S. government debt in Friday, ratings firm Standard & Poor’s also hit 10 insurers with downgrades on Monday, citing their exposure to, of all things, sovereign debt.

Despite the hullaballoo, the downgrades are likely to have little impact on the operations of U.S. P&C insurers, says Robert Hartwig, an economist and president of the Insurance Information Institute (I.I.I.). While the ultimate ramifications of action on the United States and global economy remain uncertain, the business model and conservative investment strategies of insurers should insulate the industry from immediate damage, he contends. “The nation’s property/casualty insurers have very limited direct exposure to the U.S. government bond market and have collectively set aside hundreds of billions of dollars to pay unanticipated claims,” Hartwig said “Both of these factors will enable the industry to operate effectively despite the recent downgrade of long-term U.S. bonds.”

I.I.I. estimates that total invested assets (including cash) held by P&C insurers exceeded $1.3 trillion at year-end 2010, and that holdings of U.S. Treasury bonds accounted for roughly 6 percent of the industry’s total invested assets. However, as sellers of annuities, life insurers may face a greater risk as rapidly rising interest rates could devalue fixed-income assets.

One group that need not fret about the financial strength of the insurance industry is policyholders. I.I.I. notes that the P&C industry’s policyholders’ surplus was a record $556.9 billion at year-end 2010, providing a substantial financial cushion. “Existing policyholders, people and businesses filing claims and those seeking to purchase insurance will not experience any difficulties arising from the downgrade,” Hartwig added.

 

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