THE 2008
FINANCIAL CRISIS:
IMpLICATIONS FOR
RE/INSURERS
Ellen Cooper looks at ways re/insurers can take a fresh
approach to asset allocation and risk management.
Extreme volatility across global markets has created some of the most crisis and that have critically impacted the financial health of insurance
difficult financial conditions that have impacted virtually every financial companies. We believe a clear understanding of these issues cannot only
sector and economy. What started as an isolated meltdown in the US help re/insurers strategically and effectively navigate the current market
sub-prime market last year has quickly morphed into a larger global environment, but also provide significant shareholder value-added
liquidity and credit crisis (see Exhibit 1 overleaf). Today, after several opportunities if the challenges and solutions are positioned correctly.
months of escalating market turmoil, it is clear that the ramifications of
the financial crisis are far-reaching, even for re/insurers.
Short-term implications
Through much of this credit cycle, most of the life and property
and casualty (P&C) insurance sector remained largely unaffected. This
As illustrated in Exhibit 2 (overleaf), the short-term implications fall
isolation may, in part, be explained by the fact that re/insurers are
under two main areas of concern: transparency to external stakeholders,
generally conservative investors and, as a sector, have fared well during
and the balance sheet and earnings implications of the financial crisis.
other difficult financial cycles. However, mortgage-related exposure on
Right now, re/insurers, similar to other institutions, are focused
their balance sheets and exposure to Lehman, AIG, and Washington
defensively on their balance sheets in order to reinforce to the
Mutual have put re/insurers under increasing pressure. Moreover, some
regulators, rating agencies and the analyst/investor community that
re/insurers have material levels of equity exposure, either through
they are maintaining adequate capital and liquidity. Lately, concern
direct investments or via liability products (such as variable annuities),
over excess capital positions has drawn much attention and brought
which are creating earnings losses and capital strains as equity markets
to light the need for more transparency. In addition, analysts and
continue to decline. Combined, these exposures have led to negative
investors are seeking to understand the re/insurers’ mortgage-related
outlooks by the rating agencies, and have necessitated unprecedented
holdings, including summarised or granular data showing asset type,
capital infusions and capital raises in the industry from some of the
vintage year, seniority, par value, book value, fair value, impairments,
largest and most stable of the life re/insurers.
and unrealised loss. There have also been recent clarifications around
In this paper, we identify the short-term implications, as well as the impairment practices as outlined by the Financial Accounting Standards
intermediate- to long-term trends that have arisen from the financial Board (FASB). Its guidance calls for more disclosures on how investors
This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice.
Please see additional disclosures.
Bermuda Re/insurance . February/March 2009 29
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