Insurance is a form of risk management that involves contracting an insurance company to provide financial protection from kind of loss or damage. The insurance industry is regulated in the U.S. mostly by state governments, which sometimes mandate purchasing their products. The world's largest insurance company, AIG, recently almost collapsed following the recent credit crisis because it was over-exposed to insurance-like derivatives such as credit-default swaps and interest rate swaps.
The insurance industry is usually divided into sectors like life, home, auto, health based on what the policy insures - some like auto and homeowners insurance are required by state law. Governments as well as private corporations write insurance policies, usually for risks like flood damage that private insurers will not cover, which partially cover all taxpayers regardless of risk and without collecting a premium payment. Investors generally use listed derivatives contracts like futures and options instead of insurance to manage risk.
The near-collapse in of AIG in the U.S. on October 2008 has inflicted short-term pain on the entire insurance industry by erodeding consumer confidence even though AIG's derivatives-trading practices apparently did not catch on with other providers, according to TowerGroup.The analysts predicty that life insurance companies in particular will re-focus their products and distribution on the consumer and cut costs to remain competitive. Life insurers are particularly vulnerable to broad-based, longer-term bear markets because they invest most of their premiums in the capital markets.
The recent changes to the federal government's Troubled Assets Relief Program (TARP) - now known as the Capital Purchase Program (CPP) - that particularly benefited AIG has now drawn interest from life insurance companies that want their share of the program to replace the expensive process of selling equity to raise capital.However, some insurers who specialize in property-casualty protection and have benefited from AIG recent near-collapse like ACE Ltd. are opposed to the industry receiving TARP money at all.
The CEO of ACE Ltd., Evan G. Greenberg, recently stated that the industry should not participate at all in the CPP because insurers play little part in restricting credit to the wider financial industry, while risks to its policy-holders are minimal. Greenberg also argued that injecting taxpayer "subsidies" into the insurance market would disrupt its competitiveness by assisting weaker players while encouraging stronger players to consolidate with takeovers.
- Insurance. TheFreeDictionary.com.
- TowerGroup: Life Insurance Industry Must Shift Product Mix, Adjust Distribution and Focus on Cost Containment During Economic Crisis. Business Wire.
- TARP May Breathe New Life into Insurers. Sandler O'Neill & Partners.
- The Insurance Industry Doesn't Need Subsidies. Evan G. Greenberg, ACE Ltd. (Wall Street Journal).