Insurance firms beat meltdown

June 28, 2009
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According to the Insurance Institute of Michigan, the state’s insurers have weathered the global financial storm. Unlike AIG, state firms have remained solvent, even as they face unusually tough markets in both the commercial and personal insurance sectors.

IIM Executive Director Pete Kuhnmuench said what has helped the state’s firms survive is what he called some “pretty stringent reserve requirements” that come from government regulation of the industry — rules that also affect the field in another important manner.

“Not only in the fact that we need to maintain a level of reserve that is pretty significant when compared to most other business categories, but also in the types of investment that we’re allowed to hold in some instances. So those more conservative investments have bode us well over the course of that financial meltdown,” he said.

“So our companies, in large part, survived that pretty well.”

Kuhnmuench said he isn’t aware of any company that is on an insolvency watch list at this point in time. The fact that the stock market has shown some life over the past six months has helped. But, at the same time, he noted that industry profits haven’t been as strong as in past years.

“Certainly, the solvency seems to be intact, but it’s been a tough market the last year- and-a-half, and quite frankly across the board,” said Kuhnmuench.

In the commercial sector, firms are selling fewer workers’ compensation policies because fewer people are employed. Sales of liability polices are also down because general business activity has been depressed. Companies offering residential insurance have paid more to weather-related claims over the last two years. And profits from auto policies, which have traditionally been solid, also have fallen.

“It’s just been tough. Part of it is related to the level of activity in a depressed economy. But I think, overall, we seem to have weathered the storm rather well,” said Kuhnmuench.

IIM represents Michigan insurers and national companies that write business in the state. The organization, which was formed in 2003, speaks for 39 property and casualty insurance firms and 52 related groups that operate in the state. IIM member companies provide about three-quarters of the auto policies written in Michigan, nearly two-thirds of the homeowner policies, a third of the workers’ comp policies and 20 percent of medical malpractice policies.

But if an insurer becomes insolvent, there is “insurance” for policyholders in the Michigan Property and Casualty Guaranty Association. State law created the MPCGA to pay covered claims when an insurance firm goes into bankruptcy. It is funded by the industry through an assessment made by the association based on the type and volume of business an insurer has in the property and casualty fields. The Michigan Life and Health Insurance Guaranty Association does the same in the life, health and annuity insurance fields.

In 2007, Kuhnmuench said the MPCGA assessed the industry slightly more than $11 million.

“Those are the funds the property and casualty guaranty association required to make good on any of the companies that would be working out of bankruptcy or default. And historically that’s kind of the neighborhood of the assessment that we see on an annual basis,” he said.

Since 2000, the assessment has ranged from $10 million to $25 million annually.

“That goes back against companies that write in those particular lines. Say if there was a company in the auto line that went into default, all the auto writers would be assessed the monies necessary on a proportional basis based upon their market share in order to make good on those contracts,” said Kuhnmuench.

“It’s important to recognize that if a company goes into default, it’s not like there are completely no assets out there. Typically, it’s just in a position where it’s not going to be able to recover, given their book of business.”

So the assessment that the industry pays to MPCGA covers the monetary difference between an insurer’s assets and the amount of claims owed policyholders. But there is a downside: Any losses companies have from an assessment can be passed on to policyholders in the form of higher premium payments.

“Ultimately, we all pay for that guaranty, if you will,” said Kuhnmuench.

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