Tuesday, January 27, 2009

Insurers to be next credit crunch victims

Posted by Yi Xin Jin (Lily)

The life insurance industry is one of the biggest victims of the credit crisis. The future of the industry is at a crossroad. Given what’s happened to AIG, the world’s largest insurance company, many people are reluctant to buy insurance today. One of the main reasons behind this issue is because people lost their confident in the insurers. Individuals are unsure of “where will the industry end up? How much potential exists in the traditional segments, traditional products, and traditional distribution channels? Will they fade away or simply fragment the market further? What's on the horizon for substitutes?” (SRI Consulting) These uncertainties derived mainly from the life insurer’s exposure to the extremely volatile and risky financial markets. In the past, approximately 15 to 20 percent of most insurance companies’ revenue derives from investments. The huge downturn in the stock market and heavy losses in asset backed securities has had a severe impact on insurance companies.

In response to the crisis of confidence among investors, central banks around the world has announced a series of actions that will provide more liquidity and effective set of instruments to stabilize conditions in both strained markets and troubled institutions. Most economically developed countries haven’t seen a crisis like this since the great depression. However, today’s crisis is nothing new but a inherent result of the captialist system. Josh Lees, a writer for Socialist Magazine writes in his article “Understanding Marxism: why capitalism is a system of crisis” that “Economic crisis is a recurring feature of capitalism. Every economic boom ends in a slump, every "golden age" crumbles into recession.” Even though, capitalism has brought wealth and opportunities for many but in the past the system has also created periods of crisis. Many economists believe that there’s no long term detriment from our current crisis; instead there can be an opportunity for change in our markets.


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