Thursday, March 12, 2009

It’s the insurers, stupid!

From the Asia Times' Inner Workings blog:

Wall Street Journal reports this morning under the headline, “The Next Big Bailout Decision: Insurers”:

A dozen life insurers have pending applications for aid from the government’s $700 billion Troubled Asset Relief Program, and the industry is expecting an answer to its request for a bank-style bailout in the coming weeks. The government so far hasn’t said whether insurers will be eligible for the program.

As I wrote March 1 under the title “The Bank Insurance Daisy Chain,”

Historically the insurance industry is the largest investor in commercial bank Tier I capital securities, preferred shares, and so forth, such that a nationalization of the banking system and a repeat of the Fannie Mae/Freddie Mac conservatorship would have fatal consequences for the insurers. They already are beset by huge problems in their commercial mortgage portfolios.

The credit of major insurers has collapsed on the credit default swap market with many of the major players (Hartford, Prudential, Metlife) trading in the LIBOR +1000 basis point range that used to indicate extreme distress. At these levels the insurers can’t fund. I have already seen anecdotal evidence that they are pushing up premiums to compensate, which will mean a loss of business in a tough economic environment....MORE

Yes and No. From Bloomberg last week:

AIG Competitors Complained About Rates, Dinallo Says

American International Group Inc., the insurer that got four bailouts from the federal government, has been the subject of complaints from rivals who say the firm is underpricing commercial coverage, a regulator said.

Competitors have said AIG was able to charge lower rates after getting government help, said New York Insurance Superintendent Eric Dinallo in an interview with Bloomberg Television today.

“We worry just as much about low pricing as high pricing,” because the industry needs to have enough capital to pay claims that may emerge years after policies are sold, Dinallo said. AIG, based in New York, sells coverage protecting companies against lawsuits, property damage and worker injuries.

Insurers including Hartford Financial Services Group Inc. have also applied for capital from the federal government, seeking to join more than 500 financial institutions that have received about $300 billion in government funds. Other insurers have complained that government aid gives a competitive advantage to the weakest firms at the expense of those that don’t need extra capital.

Government help “allows unhealthy insurers to grab more market share in the short term at levels that are unsustainable in the long term,” said David Sampson, head of the Property Casualty Insurers Association of America, an industry group, in a statement last week...MORE

HT: The Big Picture who comments:

Moral hazard not only encourages more bad behavior from poorly run firms, it punishes the good behavior of well run firms.