What Insurance 'Bailout' Means for Your Policy

Richard Fine woke up Thursday morning, sat down to write a check to his insurance company, Genworth Financial, and while listening to the news realized the very company to which he was about to send his money was asking the federal government for a bailout.

"I didn't expect to see my insurance company seeking a bailout. I didn't think insurance companies could fall prey to the same problems as the banks, but I guess we all should have known better after AIG," said Fine, 62, a business owner from Ridgewood, N.J.

Would You Invest Cash in the Bank Bailout?

The Treasury Department announced this week that Genworth, along with some of the country's largest insurers -- Hartford Financial Services Group, Lincoln National Corp, Prudential and Aegon -- would receive assistance through the Troubled Asset Relief Program, the same emergency fund established last year to bail out ailing banks.

Life insurance companies are increasingly in trouble. Their ratings and stock prices have fallen precipitously in recent weeks.

The federal government, the insurance companies, and the state guaranty associations, which serve as safety nets in case an insurance company fails, insist no one should be worried. But for millions of Americans who depend on insurance to take care of their families in case they die, or rely on money they receive from annuities, news of the bailout has them concerned.

"Yes, I'm concerned. Life insurance and long-term care insurance protect you against something going wrong in the future. Long-term care can drain a family's savings. I have a wife and two kids in college and I would just as soon not drain what's left of our equity if I ended up in a hospital," Fine said.

Intervention, the government and the insurers say, is not a bailout for failing companies -- comparable to the assistance banks received last year -- but the newest tool in an arsenal intended to keep the insurers solvent and policy holders protected.

Life Insurance Companies Safe From Financial Crisis

Korea - Life insurance companies around the world are going through difficult times following the onset of the global financial crisis ― AIG, the biggest insurer, practically collapsed. Life insurers here, meanwhile, are relatively better off due to strict regulation of derivate products, according to Korea Life Insurance Association Chairman and CEO Lee Woo-cheol.

``The life insurance industry is facing difficulties as the worsening economy has begun to affect it. They are having problems managing their assets amid interest rate falls, and monthly premium payments are falling. Some subscribers are canceling insurance policies and the solvency margin ratio has fallen. However, they are in much better shape compared with insurers in other countries,'' Lee said in an interview with The Korea Times.

Indeed, figures have worsened for life insurance industry. Their net income for the third quarter of 2008 stood at 761 billion won, plummeting by 948.3 billion won from a year ago. The solvency margin ratio, which represents their fiscal soundness to pay insurance money, fell by 29 percentage points.

However, life insurers here, though small in global scale, have successfully survived, thanks to strict regulation on life insurers' investment in derivative products.

Life Insurance Industry Needs Deregulation

Though regulations on derivative investments helped them withstand the global crisis, the life insurance industry needs deregulation from a broader perspective, according to Lee. This is true when one focuses on the imbalances in the financial industry, especially between insurers and banks.

Life Insurers Contribute to the Community

Life insurance companies around the world are actively engaged in social contribution programs, giving back part of their earnings to the community. Lee explained that life insurers here are running social contribution programs from various spheres, running their own programs as well as participating in joint programs by the industry.

Insurance Essential in Aging Society

Lee said in a country like Korea which is seeing an unprecedented pace of aging, people need insurance policies. ``The population aged 65 or older reached 7.4 percent in 2001, categorizing the country as an aging society. It is expected to become an aged society by 2020 with the ratio reaching 15.1 percent,'' the chairman said.

He pointed out, however, that the state welfare system here is not good enough to guarantee a stable life after retirement. He said that the life insurance industry makes up for the loopholes, providing insurance products such as whole-life, annuity and nursing insurances.

As insurance policies are safety nets for the family economy, the chairman advised people not to cancel policies if they can. ``It is better to keep insurance policies especially when the economy is bad. I think life insurance is the means of practicing love for one's family and respect for life,'' Lee added.

He recommended integrated insurance products, which protect against various risks in life such as disease, injury, and death or disasters at relatively small premiums.

Life insurers profit even as sales fall during recession

Since year 2000, the only gain in U.S. life insurance sales was a small blip that lasted 4 quarters after the September 11 terrorist attacks back in 2001.

The life insurance industry has experienced a year-over-year revenue decline in every quarter since the fall of 2002.

Still, the life insurance industry remains highly profitable due to buoyant sales of other products.

Annuities now generate about 38% of total life insurance industry profits, while accident and health insurance sales contribute 26%.

Life insurance sales represent 32% of the industry’s annual cash gains, according to an analysis of U.S. life insurance industry profits for 2006. Miscellaneous financial products bring in another 4% of profits.

Recession Further Depresses Life Insurance Sales
Based on a historical study, the Insurance Information Institute’s presentation entitled Source of U.S. Life Insurance Industry Profits 2006 concludes that during a recession:

Policy loans increase.
Life insurance lapse rates rise.
Because of the severity of the current recession, the above two life insurance trends are expected to accelerate. That is, more consumers will take out loans on their life insurance due to the credit crunch while more policyholders are expected to cancel their life policies because they can’t pay their premiums.

While group life insurance sales contribute only 6% of industry profits, group life revenues will probably shrink further as companies cut back on their head counts.

Group accident and health sales should show a more significant drop, since about 18% of total life insurance industry profits came from these products in the early days of the current recession. Also, claims for disability income benefits typically rise during a recession due to such factors as stress, anxiety and depression. These in turn cut into life insurers’ profits.

Life Insurance Companies Will Remain Profitable
By focusing on annuities and similar pension products, U.S. lifecos are strongly positioned to profit from servicing the retirement needs of 84.2 million American baby boomers age 60 and over.

That 84.2 million number is from the U.S. Census Bureau age data of the United States for 2006, and it shows how powerful a force baby boomer spending is on the profitability of the American life insurance industry.

Profitability should continue to grow, even if life insurance sales diminish over the longer term.