The financial crisis has had a large impact on the life insurance industry in particular. However, they are well position to withstand the crisis now and for years to come. This is an article that was recently published by the American Council of Life Insurers addressing this issue.
America has been battered by a financial crisis. Like all financial service providers, America’s life insurance companies are feeling the effects of a tight credit market and declining stock and bond values. But the life insurance industry remains well-positioned to withstand the crisis and continue its proud tradition of honoring its obligations to policyholders. The life insurance industry holds about three times the minimum capital required by law to remain solvent and operational.
In fact, 2008 projections indicate life insurers held more than $3 trillion in their General Accounts. These funds back the promises made to policyholders. Additionally, life insurers enjoyed a surplus of $256 billion at the end of 2008.1 This surplus represents assets above and beyond what is required to pay expected claims. While these figures represent declines due to the crisis, the life insurance industry still has more-than-sufficient assets to pay all expected claims. Every business day, life insurers pay out on average $1.7 billion to policyholders and beneficiaries.
In addition to the industry’s solid asset base, insurance consumers enjoy the protection of state insurance guaranty associations, which provide a level of protection to insurance policyholders for their guaranteed contract benefits. These associations ensure policyholders receive benefits in the unlikely event of an insurer insolvency (up to the limits specified by state law).
Life insurers are in the business of long-term financial and retirement security. Consumers who purchase a life, long-term care or disability income insurance policy or an annuity today establish a long-term relationship with their insurance companies, often paying premiums for 20 years or more before filing a claim or collecting payouts. When that claim is filed, or payouts begin, the life insurance company must have the assets to honor its obligation to its customer.
Life insurers manage their assets to reflect the long-term nature of their obligations. These premiums are invested primarily in high-grade corporate bonds and in government bonds. Conditions in the financial markets may change many times during the period life insurers hold their assets. Because of their long-term outlook, life insurers can choose the appropriate time to sell their holdings and need not sell in a depressed market. At the same time, premium income helps provide liquidity to insurers regardless of market conditions.
As major investors in long-term corporate bonds, life insurers perform a unique role in America’s economy. They function as the credit arm of corporate America, providing funds that businesses use to expand and create new opportunities. Without this credit, economic growth could be severely hampered.
Life insurance consumers enjoy a financial safety net provided by state insurance guaranty associations. Each state has its own life and health guaranty association whose goal is to resolve policyholder claims (up to specified limits), or assume or transfer policies on the rare occasion an insurance company has insufficient assets to pay benefits claims. State laws require insurance companies to be members of the guaranty associations in every state in which they are licensed to do business.
1 Based on ACLI tabulations of 2008 preliminary data of the largest 50 life insurers, representing 72 percent of industry general account assets. AMERICAN COUNCIL OF LIFE INSURERS | Protection. Savings. Guarantees. 101 Constitution Avenue, NW, Suite 700, Washington, DC 20001-2133 www.acli.com
Information posted by Jamie K. Fleischner, President of Set for Life Insurance by KF Financial, Inc. headquartered n Greenwood Village, CO.