How Debt Ceiling Politics Impact P/C Insurance Industry

August 1, 2011

As they watched Congress struggle to put a debt deal in place by Aug. 2, U.S. insurers worried about their companies’ portfolios, short- and long-term interest rates and a decline in equity markets.

The leading concern among insurers in the July 28 – 29 survey was a possible decline in capital (37%), followed by a lack of market liquidity and stock market volatility (both at 26%) should Congress fail to reach an agreement, according to an online survey of 35 insurance executives by global professional services company Towers Watson.

More than three-fourths of the insurers (80%) who responded said they expected a slight or even moderate increase of up to 100 basis points in short-term rates if no debt agreement is reached. Only 14% said there would be no impact on short-term rates. While insurers said the impact on long-term rates would be similar, they were slightly more pessimistic in their outlook: 34% believe long-term rates would rise slightly (less than 50 basis points), 28% believe they would rise moderately (50 to 100 basis points), and 23% believe rates would increase significantly (more than 100 basis points).

The overwhelming majority of U.S. insurers (91%) said an agreement on the debt deal would not impact their companies’ credit ratings.

President Obama and Congressional leaders Sunday night agreed to a plan to raise the federal debt limit that includes sharp spending cuts but no new taxes. It breaks a political logjam that raised concerns about a possible government default. The plan awaits Senate and House approval before taking effect.

“Insurance companies have proven to be quite adept at managing the myriad risks confronting them, and this current situation regarding the debt deal is no exception,” said Tricia Guinn, managing director of Towers Watson’s Risk and Financial Services business. “Moving forward, they should continue to be proactive and seek additional risk management opportunities in this fluid environment.

Most respondents believe credit spreads would increase if a debt deal is reached, according to the survey. While 20% said they expect rates to increase across the board, 45% expect rates would increase, but would affect higher-quality issues less. Only 9% said lower-quality issues would be affected less; 9% also said that there will be no impact on credit spreads.

All insurance executive respondents asserted the equity markets would decline if a deal is not in place, although the magnitude of the expected decline varies: 37% believe the decline would be slight (less than 5%), 52% believe it would be moderate (5% to 10%), and 11% believe it would be severe (more than 10%).

“There is still some amount of trepidation among insurers with regard to capital losses and market volatility,” said Carl Hess, Towers Watson’s global head of investment. “A debt deal could give some much-needed relief to the equity markets.”

In the unlikely event that the federal postpones the payment of interest or principal on obligations that come due in the near term, the property/casualty insurance industry, as a whole, is uniquely positioned to hold its own, according to another report from industry actuaries.

Demotech Inc., a financial analysis firm located in Columbus, Ohio, reported that although the P/C insurance industry holds approximately $150 billion of U.S. government obligations, less than $50 billion matures in the next year. Given that the amount of principal and interest due from the U.S. Government to the P/C industry in the next 12 months represents only three percent of the P/C industry’s aggregate cash and invested assets, which are approximately $1.325 billion, the P/C insurance industry will not be adversely impacted if there is a disruption in these cash flows, according to Demotech.

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