Master's in Finance

As large participants in the markets, many insurance companies faced extreme devaluations of their investment portfolios in 2008 when the financial markets experienced rapid declines in value and extreme volatility. Life insurers were hit hardest because of their “aggressive investment strategies in the bond, equity and fund markets in which non-life insurers were only minor players” (Baluch et al, 2009). For some insurers, the devaluation of their investment portfolios resulted in rating downgrades and scepticism over the strength of their balance sheets, adding further downward pressure on overall valuations and stock performance. The figure below (MSCI, 2018) shows the MSCI world index and MSCI world insurance index, rebased at 100, from May 2003 to May 2013. It demonstrates the extent to which the performance of insurance company stocks fell in line with that of the equity markets during the credit crisis. As can be seen, over the course of 2008 both indices lost roughly 75% of their value and although the overall equity markets recovered to pre-2008 levels

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Miheer Chanrai

by around February 2012, the world insurance index had still not made such a recovery even by May 2013.

While the value of their assets began to fall, the liabilities faced by insurance companies also began to increase, which added further pressure on their balance sheets. For liability insurers, in particular, claims rose significantly during the crisis as individuals and businesses who had been hit by losses sought compensation for their losses. During the period there was an increase in directors and officers (D&O) and errors and omissions (E&O) claims. These claims mainly arose when professionals were sued on the grounds that they had miss-sold investments or assets or had made errors and/or omissions regarding them in the run-up to the crisis. As professional services providers sought to indemnify themselves, and their counterparties sought recompense, the volume of claims rose sharply- “one analyst suggests that claims will reach... US$5.9 billion for D&O and US$3.7 billion for E&O” (Advisen, 2008. In Baluch et al, 2009). The effect of this increase in volume has likely been a dampening in the underwriting of such products in the immediate years following the crisis, as well as increases in the premiums for them.

Underwriters of mortgage insurance were also directly hit as a result of the crisis. The number of defaults and foreclosures in the housing market spiked as subprime borrowers could no longer afford to pay back debts on properties whose values rapidly fell, causing lenders to make claims. Similarly, other credit insurers had significant increases in their liabilities- as businesses across the globe faced delays and defaults on their receivables they began to claim against them.

The figure below shows insurance