In America, life insurance companies which rely on investment income to make a beneficial impact on their policies are under pressure due to the economic downturn. Several have been damaged by heavy losses on their holdings of commercial properties, mortgage-backed policies and corporate debt.
However, despite all the hysteria, Hunter a former insurance regulator said the current situation is not as bad as everyone thinks: "I'd say most companies are in OK shape" because of the capital they built up before the finan
ial markets went into a tailspin, he said.
Still, the number of troubled life insurers is increasing. So far in 2009, three have been put into receivership by state regulators, and lack of financial strength has not helped the situation, with $50 million being lost linked to related investments in the preferred stock of Fannie Mae and Freddie Mac.
In an attempt to aid the life insurance sector, the industry asked the National Association of Insurance Commissioners late last year to ease some of the organisations regulations for measuring capital and surplus. A January hearing turned down this request.
In other states, insurance regulators responded to this cry by allowing certain firms to adopt more flexible accounting measures that boost the insurers capital, surplus and risk-based capital ratios. However, any insurers who use this method must describe what impact the changes had on their net income.
Life Insurance in the UK
Unlike America, the life insurance industry in the UK is calming down from the sudden boom of people taking out life insurance since the credit crunch began, but it has not had an easy ride.
The insurance company, Standard Life famously reimbursed 97,000 customers who lost 5% of their money when the value of its Pension Sterling Fund was cut in January. The insurer faced angry protestors who accused it of misleading them about the funds underlying investments.
Like America, the company lost money through its riskier mortgage-backed assets and matters over compensation worsened the problem: "Having conducted our own review of the literature for the Pension Sterling Fund and listened carefully to what customers and advisers have been saying to us, it is clear that many people were not fully aware of the nature of the fund," Standard Life said.
Tom McPhil, a pensions expert said that more money could be lost: "There is a possibility of further falls in the value of this fund's investments, and we won't see Standard Life compensating people a second time."
The credit crunch has further bruised the company, forcing it to cut 195 jobs. The biggest cuts will be Bristol, where 69 jobs will go, 22 posts will be lost in Watford and 10 in London.
This experience has left many consumers shaky over such polices and hesitant to use their hard earned money is such policies again.
Attitude towards Life Insurance
However, it could be argued that life insurance has calmed down not only because of the recession, but also due to attitudes towards such policies.
It has been revealed that young people in Great Britain are neglecting life insurance and other forms of protection payment cover.
Data from an insurance provider found that just 3% of its new customers in 2008 were under the age of 25.
Matt Morris, from the company explained that more needs to be done to boost life insurance sales: "Clearly more effort needs to be made to reach younger people. Many younger people have debts, mortgages and families that need financial protection in the event of the main income provider being unable to work."
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