Willis Report Sees Minimal Insurance Impact from Credit Crisis – So Far

October 21, 2008

A new report from Willis agrees with the overall consensus that the general insurance sector has “seen limited impact from the current credit crisis, with carriers having relatively limited exposure to subprime investments and relatively few experiencing negative ratings actions.” But it wisely added the caveat that this is the case “so far.”

The report by Willis’ Market Security team notes that “unlike banks, general insurance companies did not play a key role in each link in the chain of transactions that originated mortgage loans and subsequently bought, warehoused and distributed the derivatives to investors throughout the financial sector.”

The report also highlights the fact that “the investment portfolios of general insurance companies typically contained smaller proportions of subprime-exposed collateralized debt obligations and less mortgage-backed securitizations compared to banks.”

Sally Bramall, Managing Director of Global Carrier Management at Willis, commented: “The general insurance sector as a whole appears to have remained relatively isolated from the direct impact of the credit crisis so far. Whilst there have been some notable exceptions, these have been companies that have stretched the boundaries of traditional insurance, assuming more of a ‘financial superstore’ structure.”

Willis analysis, however, does highlight “three indirect impacts of the credit crisis on insurers that may become more apparent in third-quarter earnings reporting, including: falling investment income due to deteriorating returns, increased E&O and D&O claims related to subprime litigation, and adverse investor sentiment against the entire financial sector.”

In addition Willis’ report concluded that “there will inevitably be some wider impact on the investment portfolios and investment returns of general insurance companies, which will become evident throughout the upcoming reporting seasons. It noted that with the anticipated moderation in the soft phase of the insurance cycle, the relatively stable rating outlook for the general insurance sector currently appears reasonably justified, but will inevitably be subject to review as financial market turbulence and attendant market sentiment plays out over the coming months.”

Source: Willis Group Holdings – www.willis.com

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