Downturn spells trouble for insurance companies (Sunday Business Post) [PIBA Quoted]

04 November 2011

The contagion that has spread through the financial system has not limited itself to banks, with insurers also feeling its effects.
The biggest shock to the insurance sector was the decision by the United States Federal Reserve to provide an unprecedented $85 billion rescue loan for insurer American International Group. The loan, in return for a 79.9 per cent stake in the company, effectively nationalises one of the largest forces in the international insurance sector.
For consumers, turmoil in the insurance sector means premiums on products such as motor, home and travel insurance could rise over the coming months.

‘‘Many of the insurers’ reserve funds were badly hit after Wall Street investment bank Lehman Brothers filed for bankruptcy protection and its peer, Merrill Lynch, was swallowed by Bank of America at a price heavily discounted from its year high. Insurance companies are likely to become more cautious following these events,” said Canice O’Reilly, president of the Irish Brokers Association. He said insurers were likely to increase premiums by between 10 and 20 per cent.
Other forces were already exerting an upward pressure on insurance premiums, even before stories from AIG and elsewhere took their toll.
‘‘The Irish market was already showing signs of hardening due to the normal cyclical risk issues, but these international forces are compounding the issue for consumers, whether individuals or companies,” O’Reilly said.
Insurers say consumers have enjoyed falling premiums for a number of years, but this now looks set to change. ‘‘There has been a huge downward pressure on premiums over the last few years, but there is a feeling in the market that we have reached the bottom,” said Tom O’Keeffe, secretary of the Professional Insurance Brokers Association.

He said some insurers had already increased premiums on commercial insurance products, and that consumers could anticipate that general insurance premiums would follow suit. For insurers, the rising cost of re-insurance - which insurers buy to insure their own losses - is pushing costs upwards.
‘‘Domestic insurers are re-insured with large international players,” said O’Keeffe. ‘‘If re-insurers are in financial difficulty, it will filter down through the system.”

But despite rising premiums, O’Reilly said consumers would still be in a better position than five or six years ago, when premiums were a lot higher and the market was less competitive. ‘‘Insurers won’t want to lose their market share,” he said.
As new players - including an increasing number of online insurers, with lower overheads than traditional firms - continue to offer insurance products to Irish consumers, he said competitive forces would prevent premiums from edging too far upwards.