Wednesday, December 10, 2008

will insurance companies be relieved of financial pressure?

The recent adoption of mark to market accounting has put many insurance companies in dire straits. One executive i've talked with was concerned his firm would have to BK.

Recently the NAIC began discussions (this last weekend) to exempt insurers from mark to market accounting. This could be a signicant development.

What is mark to market accounting?
It's an accounting method that forces companies to value their investments at current market price.

Why is this good?
It prevents "phantom capital" from being kept on the books - imagine what a company would be worth if all it's capital were tied up in valueless Fannie May bonds?

What is it bad?
Not all companies trade their investments. Bonds retain their value if held to maturity (provided the bond issuer is solvent at that time). Many insurance companies have long term debt investments that are low in value now but were never intended to be redeamed before maturity - they can do this based on the long time between policy issuance and claims for certain types of insurance - such as life insurance.
however, if you discount the value of these bonds - even if their government bonds - the insurance company will look like it has less money available to pay claims.

Most property and casualty insurers are not at risk here, however, life companies are.

I would expect this issue to be addresses shortly.

Regards, makingourway

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