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Is My Insurance Insured?

Posted by Larry Doyle on March 12, 2009 6:30 PM |

The world of insurance occupies almost every corner of our lives. Life, home, auto, disability, long term care, personal articles. Rather than addressing what is insured, an easier question may be to ask what isn’t insured.

insurance-policies1Given the intricate web of products and accompanying risks, we clearly are not currently dealing with your grandfathers’ insurance companies.

All that said, insurance is a relatively simple business. A policy is underwritten, premiums are collected and invested, and on and on we go. In fact, with major policies incorporating outsized risks, insurers can “lay off” risk with reinsurers, such as Munich Reinsurance, Swiss Reinsurance, and General Reinsurance. One would think this should be a steady and stable, if not quiet, industry. It would be such if companies did not reach for outsized returns through ever greater risks, primarily in the products in which they invested. While The Quiet Company, Northwestern Mutual invests primarily in high quality corporate bonds, entities like AIG trafficked in esoteric CDS. Hartford Financial Services played in the lower credit sectors of the commercial mortgage space, sub-prime mortgages, and junk bonds.

While the government has already taken an 80% stake in AIG, how do the state insurance commissioners deal with entities like Hartford, Met Life, and others with outsized risks and resulting declining capital cushions? Let’s go visit Uncle Sam!! That’s right, if you thought “bailout nation” was already swamped by banks, automotive companies, and Freddie/Fannie, the fun continues:¬†The Next Big Bailout Decision: Insurers.

While banks have played the political lobbying game from both sides, insurance companies have paid more into the Republican coffers over the years. Could that impact how this Democratic administration and Congress treat them? Perhaps. Who ultimately pays? That’s right, me and you!!

As individual consumers, each of us needs to be fully aware that as a policyholder we have credit exposure to our insurance company. While I do not expect to see any state commissioner allow an insurance company, especially the large ones, to fail, these commissioners may temporarily suspend withdrawals in order to allow the company to replenish its capital cushion. What does that mean? Most premiums throughout this industry are headed higher. Competitive shopping at this juncture is a must. In fact, make your broker or agent earn your business.

While the media has largely focused on the problems at AIG with passing commentary on the industry at large, Sense on Cents has been addressing this topic for the last few months. Please revisit my piece from early January, Got Insurance?

Perhaps your brokers and agents may want to review it as well!!


  • TeakWoodKite

    “AIG trafficked in esoteric”… hell of a high that stuff!

    I just purchased insurance today for a child o mine.
    Since the car is a starter, I do not plan on
    replacing it, if (knock on wood) anything
    damage occurs. I think back to Katrina and
    what happened to so many people. Who paid for
    insurance and got (*&^.
    I am required to have insurance to drive but these companies seemingly are not required to meet any requirements for solvency and will leave the field
    at the drop of a hat when they lose the bet.

  • Larry Doyle

    I hear you. Very often it seems like that proverbial “one way” street.

    We had coverage with a carrier for close to 20 yrs. Never an issue. We have one incident in which we were totally blameless and they pull the coverage.

  • fiscalliberal

    Larry – pretty interesting article regarding insurance at

    Apparently the counterparties are really upset about MIBA spliting up their comany. Counterparties have some concern regarding solvency of CDS component.

    Apparently MIBA did it to protect their bond insurance business.

    These are truely dynamic times

    • Larry Doyle

      Fiscal…this restructuring of MBIA has been in the works for the better part of the last year so it should come as no surprise to any counterparty. MBIA’s move is the equivalent of the good bank-bad bank model.

      Any entity that held mortgage bonds with an MBIA insurance wrap should have written down the value of those bonds because that insurance wrap is worth a lot less than initially thought. The risk these entities had was MBIA’s credit. Honestly, the mispricing of counterparty credit risk, whether MBIA, AIG. AMBAC, FGIC (other monoline insurers) was one of the greatest mispricings in the market over the last 5-10 years.

      These entities can kick and scream all they want but I see their complaints going nowhere.

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