Impact of the credit crisis on insurance companies

Owing to differences in business models, insurance companies are less affected by the credit crisis than the banking industry is. Insurance companies are generally not at risk of a bank run given that, for example, in non-life insurance, payments are linked to claim events. In addition, insurers are funded in advance. In life insurance, surrendering a contract has disadvantages such as lapse costs, so that the policyholder has a limited incentive to terminate the contract. Furthermore, many insurers, especially those from continental Europe, do not have significant exposure to mortgage-backed securities (MBS) and other forms of securitization and thus have not been directly affected by the credit crunch that was at the root of the current financial crisis.3 Underwriting risk comprises a high proportion of an insurer’s overall risk. The liability portfolio is diversified and, in many lines of business, is largely uncorrelated with the asset side (and, hence, to the capital market in general). Again, this is an important difference from the banking industry, where the portfolio of outstanding loans is highly correlated with general economic factors.