The last two years have been turbulent for insurance companies: The aftermath of the COVID-19 pandemic effectively reconfigured a good portion of the global economy and contributed to an unanticipated jump in inflation that is just now receding, and the Ukraine war--as well as the conflict in the Gaza Strip--has increased geopolitical instability. The impact of these events has caused their potential liabilities to increase at the same time that investing has become more complicated.
This turbulence has wreaked havoc with insurers’ balance sheets. In 2022, U.S. property and casualty insurers reported an annual loss of $3.8 billion and $26.9 billion in 2023.
Insurers have responded by sharply increasing the cost of car insurance and property insurance in the last few years. They have also dropped the customers who constitute the biggest potential outsize risks, such as thousands of homeowners in California with homes at risk of being affected by wildfires. Over eleven percent of all homeowners do not currently carry insurance.
The insurer most attuned to the vicissitudes of the global economy these days must be AIG, which nearly went under during the 2008 financial crisis due to its Financial Products division. This entity effectively provided insurance to investors buying bonds, and the collapse of the housing market resulted in many of these bonds going into default.
In the aftermath, it closed its Financial Products operation and received $180 billion in loans from the Treasury and Federal Reserve, which it paid back in 2012. It also spent several years being categorized as a Systemically Important Financial Institution, which subjected it to enhanced oversight and constraints on its activities.
The government removed AIG from SIFI status in 2017, after the Financial Stability Oversight Council determined its balance sheet was healthy and did not represent a threat to the economy. It is abundantly clear that the company is doing everything it can to ensure that it never faces such scrutiny again.
Today, AIG is a stolid firm that sticks to its knitting by avoiding undue risks in who it insures and how it invests. Its general insurance combined ratio, a key metric of an insurer’s fiscal health, was 87.6 percent in its most recent report, up forty basis points from the previous quarter. In a market with considerable headwinds, it has managed to enhance its fiscal position by increasing premiums, jettisoning potentially problematic insureds, and boosting its investment income without taking on undue risks.
It also wrapped up its spinoff of Corebridge Financial life insurance unit earlier this year as well, which simplified its business and allowed it to fully concentrate on its core competencies, which are property and casualty insurance.
The global economy is facing tempestuous times: political instability, inflation, a debt crisis, housing unaffordability, and so on. If insurance companies are unable to function, that’s one less line of defense we all have against disaster. No one’s safe if even the insurance company isn’t there to worry about us getting hurt.
