Insurance Industry's Financial Strength Overwhelms Any Threat from S&P's Downgrade

The P&C industry has limited exposure to government bonds and has enough financial strength in reserve to cover the equivalent of 12 Hurricane Katrinas, according to the Insurance Information Institute.

As it was during the financial crisis, the insurance industry is showing itself to be an island of stability in a chaotic financial system as the effects of S&P's downgrading of U.S. government credit-worthiness. The Insurance Information Institute (iii) reports that the U.S. debt downgrade will have "no significant impact on insurers."

An iii statement yesterday reported that Standard & Poors had "downgraded its long-term counterparty credit and financial strength ratings and related issue ratings on all AAA- rated U.S. insurance groups to AA+ with negative implications." However, the statement, added, S&P said that in the event of a U.S. default, the rating agency would expect the identified insurance groups' "losses, if any, to be modest and manageable relative to capital."

Robert Hartwig, the iii's president explains that American P&C insurers have very limited exposure to the U.S. government bond market and have ample cash reserves to pay potential claims. "Existing policyholders, people and businesses filing claims, and those seeking to purchase insurance, will not experience any difficulties arising from the downgrade."

The iii statement also references a statement from the National Association of Insurance Commissioners (NAIC) to the effect that there will be no impact on insurer investments in U.S. government and government-related securities as a result of S&P's downgrade.

In a review considering the magnitude of premium income versus U.S. bond interest income - which the government will pay in any event - and also factoring in record-breaking 2010 policyholder surplus, the iii concluded:

Even considering an extremely unrealistic scenario whereby all U.S. government bond holdings were valued at their nominee value, P&C insurers would still have the assets they needed to cover all of their liabilities plus a "cushion" for unexpected claims equal to $500 billion, the rough equivalent of 12 Hurricane Katrinas, the costliest natural disaster in U.S. history.

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio