In the Crisis’s Wake, the Financial Services Industries Assess the Damage and Look to the Future
In the latter part of 2007 financial services industry observers were already talking about the subprime mortgage crisis and wondering how bad it was going to get. It was troubling enough that many banks would suffer significant losses as a result of unsound lending, but these losses also converged with broader economic factors that characterized a general economic downturn, which manifested itself at a time when the P&C insurance industry was on the soft side of its market cycle.
Speculation about the downturn's probable depth and duration resembled that of the post-dot-com bust period, and observers asked whether and when a genuine recession would hit. However, there was a darker question seldom heard outside of the industry itself: Where exactly is all the bad subprime debt and how bad is it?
Over the past few months, any hopes that further losses would be manageable exploded with a subprime-driven credit crisis that precipitated the emergency takeover or outright failure of some of the country's top financial institutions: Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch and AIG. The contagion spread to financial institutions in Europe, and panic struck markets around the world. The U.S. government, after bailing out or otherwise supporting rescues of major institutions in September, passed a $700 billion plan to avert a credit freeze that threatened to paralyze the global financial system.
The financial world is still in turmoil, demonstrated by continuing projections of losses and vertiginous fluctuations in the securities markets. Perhaps the efforts of governments and the financial industry will help avert the worst of possible outcomes. But more than a year into the crisis, we still don't know how bad it's going to get.
One area of agreement is that the problems in the global credit markets did not arise due to a lack of effective technology, as there are plenty of solutions available for risk modeling and analytics, underwriting, and reporting. The trouble ensued when senior management ran models based on faulty or overly optimistic data, or ignored warnings. Regardless, financial services IT organizations will bear much of the burden of restructuring and implementing new, more-effective governance and risk assessment processes.
Financial services companies will need to respond to the challenges the crisis presents. In this special report, we briefly explore what those challenges are likely to be for the insurance industry, and share coverage from Insurance & Technology's sibling brands about the impact of the crisis on other financial services industry segments.
Special Report
InsuranceIT Will Power Insurance Industry Response to Crisis
Insurance budgets will remain relatively stable as carriers see IT necessary not only for ongoing transformation but as a key tool for addressing crisis-related challenges such as the need for better underwriting results and improved risk management.
Banking
Credit Crisis Reshapes Banking Landscape
Wall St. disappears; divide emerges between big banks hampered by losses and community banks in the market for new technology.
Capital Markets
As Crisis Escalated, Firms Failed to Communicate With Worried Investors
When the financial crisis escalated with the fall of Lehman Brothers, the AIG bailout and the sale of Merrill Lynch in September, firms failed their client base, according to a report.
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
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