Monday, December 22, 2008

The Global Economic Downturn: Bad For Insurance Companies?

While major insurance companies – like AIG – have recently felt the pinch of the global economic downturn big time, is the current global economic crisis really that bad for all insurance companies?

By: Ringo Bones

Even though times of economic austerity usually spells reduced profits for all sorts business activity, many in the insurance underwriting sector are now hard at work devising various schemes. Schemes not only on how to stay afloat during our on-going global economic downturn, but also ways for their company to “make a killing” despite other financial institutions failing on the left and right.

From the perspective of risk assessors, insurance companies had become very indispensable part of our modern economy. Everyone now knows that every economic unit is subject to risk. Various organizations for economic activities and business organizations may have their goals and raison d’être completely destroyed if protection by insurance doesn’t exist. Paradoxically, insurance is even more important for the small business organization than for larger business organizations - which can meet small losses without difficulty.

Financial stability can also be maintained through credit insurance. A business concern that suffers losses through the insolvency of customers can normally meet these conditions by a reserve for bad debts. However – especially during times of widespread economic crisis - a severe amount of loss due to insolvency of various customers may cause serious financial difficulties. This adverse situation may be minimized by credit insurance.

Even though credit insurance had became indispensable due to the fact that credit is already a vital part of our economy, but during times of widespread economic crisis, the consequence of unexpected losses has been inevitably turned into a model that develops slower than previously intended. I mean an insurance company won’t last very long if the funds it set aside for pay outs must be injected with funds reserved for other things. Like funds set aside to keep up with the latest Basel Accord Compliance rules, cost of running the company, etc.

By no means utterly dire, insurance companies could manage to keep themselves afloat during times of economic crisis if it is skillfully managed. But given that the Bull Market is already for all intents and purposes an extinct species for the foreseeable future, it is highly unlikely that most insurance companies can “make a killing” during times of economic austerity.

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