Monday, February 16, 2009

Bailout – what is in it for Insurance Company?

By Li Bin Chen

The original $700 billion bailout package was intended to save the American banking system. But the insurance industry was hoping for some money too. With the initial financial crisis, if insurance companies in America and Europe come under pressure, equities and bonds worldwide could easily be hit with another wave of selling. Some people even consider that the insurance industry is even more international in term of its transaction of material purpose given the extensive, long standing reinsurance agreements between domestic policy writers and specialist risk buyers internationally.

If AIG’s portfolio was simply a reflection of established practice, then the amount of money required to support the insurance industry could well exceed the Treasury’s budget for banks and financial institutions. Insurance industry report losses from real estate investments and derivatives making them vulnerable to the financial crisis, that they need the help from the government. The nearly collapse of AIG establish the foundation of where the crisis will be heading to, triggering a new wave of problems for the financial markets.

After the bailout of insurance giant AIG, insurance companies are lining up for federal dollars, leaving some consumers worried about their insurance policies. Consumers were asking what would happen to their insurance policies if their insurers went under. They want some “insurance” on the condition of the investment or the contracts that they have purchased. Most of the insurance companies had request for a TARP (Troubled Asset Relief Program) investment from the government saying that it will be a prudent move given the potential market volatility. The insurance guaranty fund organizations had claim that if one or more insurance companies go under, they are prepared to step in to ensure that most consumers will continue to receive the benefits guaranteed by their policies.

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