Credit rating company Standard & Poor’s ( “S & P”)  issued a strong risk management and capital adequacy of the insurance industry in North America to disprove an lingering rumors of an insurance industry meltdown. S & P pointed out that the U.S. economic downturn will be the most significant challenge to the insurance industry in 2009.

S & P expects that insurance companies to continue to pay attention to the various capital management strategy, product pricing and affect the business structure of the portfolio, profits, capital market risk ratings. At the same time, S & P pointed out that the current economic climate during the recession have become more realistic, in the past, a small error could now lead to serious consequences.

S & P said that in 2008, the United States had a  few insurance companies in the field of vision to negative, which means that in the coming year up to 18 months, downgrades to the number of bodies will be more than the number of upgrades. The imbalance is likely to drag a number of insurance companies. S & P believes that 2009 will be a challenging year. This will be the most prominent aspects of capital adequacy ratio. Of course, the whole, the insurance industry in North America’s capital adequacy situation is relatively better, and there is a clear risk.

In addition, the S & P believes that the insurance industry in North America on the assessment of credit quality, strong risk management has become increasingly important.

Taking into consideration the insurance industry as a whole operating performance, S & P said that the United States will risk individuals (including vehicle insurance and home insurance) from a stable outlook to negative due to the continuing decline in revenues.

S & P expects that the economic slowdown will continue until 2009 story, so that the insurance industry faces the challenge of further expanding the environment. Decision-making and implementation of operational mistakes will enable a number of insurance companies and their rating of “injured” in the current financial crisis during the performance will be more evident.

S & P predicts that in 2009 U.S. commercial insurance situation will not risk more than a good number. In line with the above-mentioned point of view, the 2009 S & P will maintain the U.S. insurance business (including property and casualty insurance) negative rating.

The global financial and housing crises, along with a sagging soft market for insurance products, are addinf up to create a highly challenging environment for the U.S. insurance industry in 2009. These factors will force insurance providers  to adopt new skills and business discipline in order to survive the economic turmoil, according to new research from TowerGroup, a firm that identifies key insurance trends.

TowerGroup expects “four Rs”— risk, revenue, regulation and retirement—to shape the insurance industry  in 2009. Risk and regulation will be the topmost priority as insurance companies pump money and resources into initiatives designed to improve risk management and meet new regulatory mandates. Increasing costs and decreasing revenues will lead to further industry consolidation and redistribution of assets. As a large number of experienced insurance workers reach retirement, the financial strain on insurers will increase as experience and expertise walk out with the retirees.

Karen Pauli, a research director said: “The convergence of several negative economic influences has resulted in unprecedented financial pressure on insurance carriers”.  Pauli also believes that the challenges are daunting and it is critical that carriers maintain a long-term vision despite the short-term economic imperatives. Carriers that focus on both financial and human resources at the enterprise level, incorporating both operational efficiency and risk management, will come out of the current crisis ahead of the pack.

TowerGroup believes that data management and predictive analytics and technology initiatives have become corporate necessities. Carriers that fail to recognize this fact will see significant deterioration in their results as well as plummeting loss of competitive position.

The research suggests that Insurance carriers must implement effective risk governance initiatives that span both the organization and its distribution partner network, where integrating information is imperative.
A drop in investors’ and policyholders’ confidence resulting from the current economic crisis will lead to increased instability in the industry and heightened merger and acquisition activity in 2009.

Cost containment must be a top priority for insurers in 2009, as well ast customer-facing initiatives to improve customer service and the ease of doing business.  Focus on customer needs  will be key to rebuilding confidence among policyholders and shareholders,” says Rachel Alt-Simmons, a research director in the TowerGroup insurance practice.

Customer-focused insurers that emphasize solutions rather than products will emerge as the top competitors in the market. Product innovation and superior service will prevail in times of economic turmoil.

Insurance premiums for businesses continued a five-year trend of falling rates during the fourth quarter of 2008, but recent data suggest a reversal of this trend may soon be underway.

Rates for property, general liability, and directors and officers (D&O) liability premiums all decreased at a materially slower pace than in recent quarters, according to the RIMS Benchmark Survey, a survey of policy renewal prices as reported by North American corporate risk managers.

Although many buyers stuck with their existing insurers, nearly all renewed their general and excess liability policies for less than they paid a year earlier-but not necessarily because of lower rates, underwriters and brokers say.

“Risk managers tracking RIMS Benchmark Survey results are keenly aware that we may not see continued price reductions for long,” says Daniel H. Kugler, member of RIMS board of directors and assistant treasurer, risk management at Snap-on Inc. “The most recent data show that the soft market isn’t over yet, but it may be losing steam.”

“Overcapacity has driven a long soft market and the events of this past quarter may portend a market shift for commercial insurance,” says Dave Bradford, executive vice president at Advisen. “In addition to much higher than average catastrophe losses in 2008, insurance companies are facing claims from the subprime meltdown, global credit crisis and now even from the Madoff scandal. Reserves for these claims and material losses in investment income have led to negative earnings and new capital is scarce,” Bradford said. “We expect the next few quarters of data from the RIMS Benchmark Survey to show the end of the soft market.”

out of concern about the financial stability of their incumbent insurer, experts say.

Premium reductions were more a reflection of an insured’s decreased exposures rather than rate cuts, although accounts with good loss histories did get single-digit rate decreases, they note.

After nearly four years of declining rates, the general and excess liability market is bottoming out and rates likely will rise throughout 2009, they say.

While the financial crisis-including the near-collapse of American International Group Inc., a leading general liability and excess casualty underwriter-may have hastened firmer rates, its biggest effect has been more buyers marketing their programs, brokers say. Collateral issues also have been a central theme of renewal discussions, brokers and insurers say (see story, page 12).

“We are experiencing a time in our discipline right now that we’ve never experienced before,” said Marty Gould, managing director and head of Marsh Inc.’s national excess casualty group based in New York. “We’ve never experienced a period where the financial ability of a carrier to pay has been questioned or challenged the way it’s been challenged over recent months. Most clients are asking us to conduct an aggressive marketing effort on first-layer umbrellas in particular. We’ve been successful in putting viable alternatives on the table. Some clients have moved, but not the majority.”

In 2008, the insurance industry fared pretty well despite the ailing economy. Even though American International Group (AIG) had to be bailed out by the federal government for a the fact is that it had nothing to do with its insurance subsidiaries, which have been performing fairly well, according to the various rating organizations.

Federal intervention in the insurance industry is one of the key outlooks of insurance companies for this year. Many agents associations believe that supporters of tougher insurance regulation will attempt to bring about federal supremacy over states in the regulation of the industry. It is widely believed that proponents of federal regulation of insurance are using the current financial services crisis to further their cause.

Some advocates of federal regulation of insurance are pointing to the downturn of the mortgage sector to justify the complete regulation of insurance industry. In reality, the insurance sector has largely been insulated from the worst of the financial problems.

In fact, the economic crisis proves that insurance should not be brought into the federal system which that failed so miserably in its supervision of banking and securities sector. The National Conference of Insurance Legislators (NCOIL) suggests that the state insurance regulatory system should serve as a model for reforms to the federal regulatory system for banks and securities, not vice-versa.

Currently, there is no single Federal agency that is tasked to the monitor the insurance industry as a whole. The industry relies on the individual state regulatory guidelines of their respective states.

However, theAIG situation should be a wake up call for companies to practice enterprise risk management (ERM). Many companies are being hurt by risks they’ve made for another business unit. Diversification is not necessarily a good thing especially if management is not aware of how different elements of a corporation affect each other.

Prospects are not grim for the insurance industry in 2009 as there may be a possible turnaround. The crisis in the financial services market has made all the headlines, but there were unexpected events Hurricanes Ike and Gustav. Ike was the third largest insurance event ever with tens of billions in property damage alone. The property insurance market will make headway considerably in 2009. Life, casualty, and other insurance markets are expected to grow slightly but insurance buyers should prepare themselves for a period of uncertainty and volatility in the coming months.

Variable annuities (VAs) have been consistent best sellers for the life insurance companies in recent years, as rising equity markets and guaranteed benefits increased their popularity. However, due to the economic downturn, it has become more volatile.

Insurers had been aggressive in offering these riders as they compete for market share as rising equity markets made them easier to fund. However, the current volatility in the equity markets is making variable annuities and their guaranteed benefits a tough sell for the life insurers this year.

A variable annuity is basically a tax-deferred investment vehicle that comes with an insurance contract, it is usually designed to protect one from losses in capital. Thanks largely to the insurance clause, earnings inside the annuity will be tax-deferred, and the account isn’t subject to annual contribution limits.

Variable annuities can either be immediate or deferred. With a deferred annuity the account grows until you decide to make withdrawals. And when that time comes (which should be after age 59 1/2, or if withdrawn earlier, you will owe an early withdrawal penalty) you can either annualize your payments which will provide regular payments over a set amount of time.

When a customer purchases a variable annuity, the insurer will invest the money in a portfolio of mutual-fund like assets. This strategy exposes the variable annuity to market fluctuations, whereby the annuity holder may see a potentially bigger payout when markets are rising, but may also risk less of a payout when markets are going down.

Insurers tend to offer a wide range of guaranteed benefits, such as guaranteed minimum withdrawal benefits. In this case, a holder can receive an income for life regardless of the value of the underlying account. Insurers may also offer a guaranteed minimum accumulation benefit, whereby the insurer will guarantee that the account will grow at a certain percentage.

Declining equity markets may also have a negative impact for those insurers with sizeable variable annuity businesses through accelerated deferred acquisition cost (DAC) amortization. Companies use DAC to defer the sales costs that are associated with acquiring a new customer over the term of the insurance contract. If a sustained decline in equity markets reduces estimated gross profits on annuities, an unlocking of assumptions may occur, causing DAC to amortize faster. Also, such changes in assumptions may lead to increased reserves for products with guaranteed minimum death or living benefits.

Experts maintain a neutral outlook on the life and health insurance industry and do not recommend broad exposure to the variable annuities for major investments. There are ways to limit one’s risk by spreading your money among several stocks protects you from a meltdown in one firm. Splitting your stash among annuities from two or more highly rated insurers reduces the odds that all your money will disappear in one go.

The recent economic slowdown has middle-market companies reassessing their relationships with insurance brokers and adopting a more basic approach to securing insurance coverage.

In the past, middle-market companies have selected their insurance brokers based on the quality of customer service provided by competitor firms. Middle-market companies tend to reward brokers that provide high levels support due to the lack of specialized risk management professionals employed by larger corporations, Recent research data gathered in the Greenwich Associates’ 2008 Middle Market Insurance Research Study revealed that companies began de-emphasizing broker customer service in favor of a straightforward approach on obtaining the best value and price in customer’s insurance purchases.

Greenwich Associates defines “middle market” as companies with $10 million to $500 million in annual sales. The firm conducted more than 18,000 interviews with U.S. as well as 1,500 large companies around the world a part of its 2008 Global Large Corporate Insurance Study middle-market companies as part of its 2008 study. the results of which will be released later this month.

Greenwich Associates asked companies to enumerate their insurance brokers and the respective carriers, and to rate both their satisfaction and their willingness to recommend these providers to other companies. Companies were asked to evaluate brokers and carriers on 25 categories in the research.

Greenwich Associates creates a statistical analysis that reveals the qualities and capabilities of brokers and carriers that are regarded to be recommendable. This analysis reveals the factors that are driving corporate perceptions and decisions about insurance carriers and brokers.

Over the past few years, customers rated customer service as the most important factor in middle-market companies’ assessments of their insurance brokers. The results of this year’s research and analysis reveal that companies are now giving equal weight percentage to three main factors: price, value and customer service quality.

This study is further evidence of the deterioration of the economy and the revenue and cost pressures faced by U.S. companies. In these tough times, companies can no longer afford to overpay for insurance coverage.

The study also reveals that companies are becoming less willing to rely entirely on carrier recommendations from their brokers and more inclined to research the capabilities of individual carriers on their own. As a result, companies increasingly are holding brokers accountable for the carrier recommendations they make.

Conclusion:
Companies are giving less consideration to brokers’ ability to provide general risk management advice and their overall problem solving ability. Based on these findings, he recession is forcing middle-market companies to be much more diligent and meticulous putting more emphasis in getting high quality coverage and service for the best possible price.

With the economy in disarray due to slowing US consumer demand and consumer confidence in the financial industry at an all time low, it is inevitable that insurance industry will have to take a hard hit for many months to come.
A few months ago, the federal government has committed $150 billion in assistance to a bailout of American International Group Inc, once the world’s largest insurer. AIG nearly collapsed last year after becoming overexposed in the largely unregulated market for credit default swaps, which was undermined by the sharp U.S. housing downturn.

Currently, there are over 6,000 insurers in the United States, but no central federal regulator for them. These companies answer to more than 50 state and territorial authorities with different practices and regulations.
Several U.S. lawmakers strongly support federal oversight of insurance companies and suggested the creation of an entity within the Treasury Department dedicated to oversee the insurance industry.

With the new White House administration, there will be major regulatory reforms to ease the crisis in the financial services sector. There are powerful factions within the industry that wants regulation centered in Washington, D.C. Several insurance companies are more welcoming to the prospect of federal regulation like big insurers such as Allstate Corp.

Democrat and Republican lawmakers share the belief that steps must be taken to ensure that a similar situation does not occur in the future citing the Federal government’s bailout of distressed insurer AIG. They also cited last year’s problems in the bond insurance industry as further evidence of the need for Washington to play a greater role in supervising insurers.

The American Insurance Association, a lobbying group for large property-casualty insurers, issued a statement of support for the lawmakers’ letter.
The new Treasury Secretary Timothy Geithner pledged to strengthen regulation of over-the-counter derivatives, such as credit default swaps, which have largely contributed to the industry’s losses and to pursue registration of hedge funds.
In a written letter to senior House Democrats, Geithner indicated that there will be sweeping changes in regulatory policy, the oversight structure and creation of better tools for crisis management.

The American public may have to wait a while until this manifests into a workable scenario. This presents a great challenge to the Obama administration especially with its policy of better government transparency. The average Joe is simply too tired of bailouts of the wealthiest companies using taxpayer money.