Ordinarily, the life insurance sector should be a safe haven for those needing help at a time of crisis of this magnitude to run to for solace. But the credit crunch is not one crisis that will easily succumb to pressure or a bailout. Several bailouts, some of them very controversial, have been introduced by governments, especially in the US and UK, aimed at taming the financial meltdown. Although the bailouts were aimed at helping banks weather the storm, they have so far failed to yield any significant result, positively. Now the big question is whether anything will meaningfully come out of this effort by the US Treasury to rescue the country’s life insurance firms.
Bailout proposal
In a few days time the Trouble Asset Relief Program (programme) will be announced by the American Treasury Department. TARP, as it is known by its acronym, is an initiative that will extend bailout funds to several struggling firms in the life insurance sector.
Although crucial to the survival of the entire economy,
life insurance companies are currently sinking deeper into financial crisis like others sectors of the economy. Thus, steering them back to normalcy, which will enable them provide greater support for the economy, is equally crucial. And TARP money is just going to be readily available for the success of this task.
Desperate situation
One of the major functions of insurers in an economy is helping to fund business by reinvesting money into different areas such as corporate bonds and home mortgages and commercial real estate loans. By performing this role they help in strengthening the economy and provide a pivot for employment. However, this function suffered a serious setback since the credit crunch invaded and rendered the industry financially weak and struggling, itself, for survival.
With their situation looking so gloomy and desperate, there is a fear that many firms in the life insurance industry would resort to seeking survival by selling assets at almost give-away prices and raise capital at all costs. Another major issue is that the bonds they hold could suffer lower rating by credit agencies. The implication, according to analysts, is that it could become more difficult for them to maintain the financial base needed by regulators to safeguard policyholders.
In order to sail through the turbulent water, somehow, capital from the Treasury is seen as a great relief, despite certain worries about what might follow. As analysts have rightly argued, this could result in the value of current shareholders’ stock being diluted, just as the gesture might help the government to extend its control over the insurers.
Eligibility criteria
Whereas it is the entire sector that is ailing and seeking a life-line, it is highly unlikely that all of it will be bailed out. To make good its promise the Treasurer has set eligibility criteria for firms that would enjoy the bailout. As such, it declared last year that “insurers would only qualify if they owned banks or thrifts.” With this position, it is clear that many would end up not getting any help.
Some insurers are, however, manoeuvring to ensure they don’t miss out. In this regard they have gone out of their way to purchase thrifts. Yet this may not help them become eligible, as they were once warned by Treasury officials that this move may not be sufficient.
