Financial Condition of Insurers
Overview: The Financial and Market Conditions of the Insurance Sector
Maintaining Stability and Security in the Face of Challenges
While U.S. insurance industry financial results have been negatively impacted by the performance of its mortgage and financial guarantee segments, the property/casualty insurance industry as a whole remains fundamentally and fiscally sound.
The stability of the insurance industry is the result of time-tested and conservative business practices. Insurance companies are not highly leveraged, and the amount of risk they assume is limited to the capital they have on hand.
The property/casualty insurance industry is well-capitalized to respond to disasters, with $463 billion in policyholder surplus at the end of June 2009.
A Note Regarding AIG: The crisis at American International Group (AIG), formerly one of the largest U.S. insurers, was due to the failure of a federally regulated financial unit. The company’s state-regulated insurance units remain solvent, continuing to pay claims and sell policies.
Key Trends to Watch
A number of business and regulatory trends, particularly at the state level, are impacting the health and operations of the insurance industry. Particular trends to note include the following:
- Market Conditions—Property/casualty insurance is a cyclical business. These cycles fluctuate between hard markets, characterized by rising rates leading to increased profits, and soft markets where prices and profits decline. Cycles differ in their severity and often affect different lines of insurance at different times. Currently, the industry is in a soft market, particularly in commercial lines of insurance where rates are low and most coverage is readily available. With the exception of property insurance for coastal homes, the price of personal lines coverages has been relatively stable, although rising medical care costs are impacting auto insurers.
- Addressing Growing Losses in Coastal Areas—Coastal properties have become more valuable and predictions of losses have increased. As a result, many insurers have reassessed their exposure in these areas and changed practices. For instance, policyholders in higher risk areas may be required to pay larger deductibles, including a percentage of the insured value of their property, rather than a flat rate.
- Auto Insurance Rate Issues—Auto insurance claims costs are increasing due to rising medical care costs, including fraud and abuse in New York’s no-fault auto insurance system. Efforts to control those costs, through comprehensive healthcare policy reform or other means could impact auto insurers. Meanwhile, Massachusetts has addressed rising auto insurance rates by introducing a “managed competition” system. Initial results are favorable, with consumers saving more than $270 million over the course of the first year (2008-09).
- III White Paper—Financial and Market Conditions
An in-depth review of recent financial results and market trends impacting the property/casualty insurance industry.
- III White Paper—Accounting: International Standards and Solvency II
An in-depth review of accounting standards and proposed changes impacting the insurance industry.