Today's report in the Wall Street Journal
that the Treasury Department may let insurance companies tap into the
$700 billion bailout fund is more proof that the state of insurers'
investment portfolios drive a lot of their corporate decisions. The Journal reports:
Among those expected to benefit from Treasury's program are insurance
firms. Most insurance companies are financially sound but have seen
their long-term investments and stock prices hurt by the recent market
With the markets in bad shape, insurance companies aren't making as much money off of the premium we pay them as they'd like. So now they're turning to taxpayers to support higher profits than the market can offer. In the past, when insurance companies faced the downside of an economic cycle -- when there wasn't a $700 billion pot of money sitting around -- the industry would push rates up and mount a lobbying effort to limit people's legal rights (if people can't sue, insurers pay fewer claims and make higher profits).
This cycle has gone on for generations. It most recently reared its head after the collapse of Enron, WorldCom, etc and the burst of the internet bubble. Across the country insurers and lawmakers suddenly began citing a so-called "lawsuit crisis" and mounted a massive push to limit lawsuits. As the markets improved, the alleged lawsuit crisis was mentioned no more and the push for higher premiums eased.
A couple of years ago, we released a study of ten insurers’ 2001 stock and bond
holdings that documented $274 million in losses by insurance companies
due to bad investments in just five corporations, including Enron and
Worldcom, that collapsed due to fraud. Overall, investment portfolios fell some $20 billion in the wake of the market downturn after insurers had increased their holdings in riskier investments during the late 1990s.
But despite the repetitive nature of this insurance cycle, a CNBC host thought it was a startling and unproven claim, when, a few months back, my colleague Jamie Court said that the real issue driving insurance company concerns is not hurricane claims, but problems in their investment portfolio. (see it here.)
The fact that insurers might come to Treasury with their cups out should be sufficient proof. But the question remains: will insurers invent another "litigation explosion" or demand rate hikes around the country even after the Feds pump them up with cash?