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The Debt Downgrade: No Significant Impact on Insurers

A background paper by Robert Hartwig, president of the Insurance Information Institute (I.I.I.), and Steven Weisbart, senior vice president and chief economist for the I.I.I.,...
August 16, 2011

A background paper by Robert Hartwig, president of the Insurance Information Institute (I.I.I.), and Steven Weisbart, senior vice president and chief economist for the I.I.I., discusses the impact of Standard & Poor's (S&P) downgrade of U.S. debt on insurers. The report notes that the ultimate ramifications of a downgrade of long-term U.S. bonds are impossible to determine at this point but, in the short-term, a U.S. bond downgrade will not adversely affect the operations of U.S. property/casualty (P/C) insurers in any significant way, nor will it impact insurer solvency or liquidity.

P/C insurers write auto, homeowners and business insurance coverage totaling more than $400 billion in premiums annually. Hartwig said, "The nation's P/C insurers have very limited direct exposure to the U.S. government bond market and have collectively set aside hundreds of billions of dollars to pay unanticipated claims. Both of these factors will enable the industry to operate effectively despite the recent downgrade of long-term U.S. bonds." Consequently, Hartwig added, "Existing policyholders, people and businesses filing claims and those seeking to purchase insurance will not experience any difficulties arising from the downgrade."

The report explains that the industry's policyholders' surplus - the excess of assets over liabilities (what companies in other industries call "net worth") - was a record $556.9 billion at year-end 2010, an 8.9 percent increase over where P/C insurers' policyholders' surplus stood as of December 31, 2009 ($511.4 billion). It concludes that even when envisioning an extremely unrealistic scenario whereby all U.S. government bond holdings were valued at half their nominal 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. The full report can be accessed at:  www.iii.org/art/debt-downgrade-080811/.

On August 8 some of the largest life insurers, securities clearinghouses and investment funds in the U.S. lost their triple-A ratings in the wake of Standard & Poor's unprecedented downgrade of the government's debt. Large segments of the financial industry, including the large government controlled mortgage financing companies, Fannie Mae and Freddie Mac, were downgraded as the U.S. lost the highest rating from S&P. It is not known whether consumers will be affected by the downgrades since members of the financial industry remain very highly rated, and S&P's downgrade of U.S. debt had little effect on mortgage rates, which are already near record lows.