Can the Debt Ceiling Debate Effect Business Insurance Premiums?
Written by Marlo .
The current debate in Congress over the debt ceiling and federal spending is raising the possibility of a reduction of the United State’s credit rating from “triple-A” to “double-A.” How? Well, the argument is that the Treasury could not make payments on existing debt. And, just like your household, when you cannot pay and are late or miss a payment your credit is damaged. The Treasury Department has stated: “If Congress fails to increase the debt limit, the government would default on its legal obligations – an event unprecedented in American history.”
What would this mean? How would this affect your business?
One effect may be an increase in business insurance premiums. How? Insurers make money from premiums and the return on those premiums when invested. Insurers must balance return on investment with risk and liquidity – sometimes those limits are just sound investment, sometimes the limits are imposed by industry regulations, and sometimes entities that monitor the strength of an insurer set limits. Your business insurer may invest in U.S. Treasuries considered (at least, potentially, until August 2, 2011) the absolutely safest investment on the planet Earth. The insurer gets a limited return with a high level of safety. It will balance that investment with riskier investments in the private market. So, let’s say 33% of your insurer’s investment portfolio exists in U.S. Treasuries. What would be the effect on that portfolio if 33% of of the investment now has a higher risk level than an investment in Wal-Mart?
A.M. Best Company issued a briefing on July 19 discussing the possible results. The analysis found:
- A rise in interest rates.
- An increase in market volatility.
- A decline in real estate values.
- Secondary effects including a decline in creditworthiness of U.S. companies and financial institutes.
Best states that it sees life insurers being at greater risk than property/casualty insurers. But, those effects will depend on the current investment picture of each insurer.
Ultimately, greater risk and less liquidity on an insurer’s investment portfolio can lead to increased premiums to lower risk and increase liquidity.