Major Changes Ahead for the Insurance Industry?

Welcome back. I hope everyone had a great Thanksgiving. This post will not be about the New York auto or home insurance coverage that we usually cover. This time I will be highlighting some larger trends that in some cases have already come to affect other industries but may now be coming to an insurance policy near you.

One such new area is that the 'capital markets' are starting to make eyes at the insurance industry. When I say capital markets, I'm talking about monies raised by the giant investment firms like Merrill Lynch or Goldman Sachs. Up until now, insurance companies raised the money needed to back their insurance products by selling stock, and collecting premiums and investing them. But now these super-sized financial companies have become experts at raising literally billions of dollars quite quickly and efficiently, in their constant efforts to find investments to sell to their clients.

Traditionally, these financial companies would raise money for other companies by underwriting offers of their stocks and bonds. So if General Motors wanted to raise a billion dollars to invest in a new vehicle product line, for example, they could have Merrill agree to make good faith efforts to sell enough shares of GM stock (remember that stock represents an ownership interest) or GM could offer corporate bonds (debt that has to be repaid, but does not give up any ownership) for a similar amount. They would have to weigh the plusses and minuses of each.

Now, however, with the advent of things like hedge funds, and giant pension funds and even major individual investors looking to put their money to work, enough capital can be raised to start whole new companies and industries. The capital markets were a major force behind the growth of sub-prime mortgages over the past several years, as investors chased higher yields which could only be had by coming up with the many strange variations of mortgages, and in many cases giving them to people who, it turns out, couldn't afford them and are now facing serious financial problems.

These companies could end up having a huge impact on major insurance coverages such as catastrophe insurance. For instance, billions could be quickly raised to offer reinsurance (the kind of insurance that insurance companies buy for themselves against major events like hurricanes) except that instead of insurance companies buying their reinsurance from traditional markets like Lloyds, or SwissRe, they might look for better deals from the capital markets.

Competition is generally good in that it reduces costs. For instance, it would help us here on Long Island right now if insurance carriers could lower their cost of reinsurance for windstorms and hurricanes. That's what is causing all the disruption in the insurance market for waterfront homes these days. On the other hand, the capital market's tendency to use overly aggressive sales pitches, and only shoot for short term profit as opposed to long term viability, can make for quite a mess. Right now we are going through a mortgage and real estate crisis that was made much worse by predatory lending practices and speculation, fostered by these 'capital markets' chasing down an extra per cent or two of interest on their money through sub-prime mortgages.

The one thing about insurance that is different from almost any other kind of product, is that you can have catastrophic, once-in-a-lifetime events like Katrina or the four hurricanes in 3 weeks that hit Florida a couple of years back. These require careful long-term planning and an industry with plenty of real money behind it. I'm not sure I want to see insurance get the same kind of treatment as the mortgage industry has gotten this year as a result of reckless short term practices over the past couple of years.

Next up, will the next Presidential election bring a total change to our health insurance system?

Long Term Mortgage Interest Rates

"Long-term mortgage interest rates moved lower Monday, and the benchmark 10-year Treasury bond yield dropped to 4.07 percent.
The 30-year fixed-rate average dipped to 5.9 percent, and the 15-year fixed rate slipped to 5.46 percent. The 1-year adjustable, however, rose to 5.48 percent.
The 30-year Treasury bond yield was down at 4.48 percent.
Rates and bonds are current as of 7:15 p.m. Eastern Standard Time.
Mortgage rate figures are according to Bankrate.com, which publishes nightly averages based on its survey of 4,000 banks in 50 states. Points on these mortgages range from zero to 3.5.
In other economic news, the Dow Jones Industrial Average tumbled 218.35 points, or 1.66 percent, finishing at 12,958.44. The Nasdaq lost 43.86 points, or 1.66 percent.... Long Term Mortgage Rates

Long Term Mortgage Interest Rates

"Long-term mortgage interest rates moved lower Monday, and the benchmark 10-year Treasury bond yield dropped to 4.07 percent.
The 30-year fixed-rate average dipped to 5.9 percent, and the 15-year fixed rate slipped to 5.46 percent. The 1-year adjustable, however, rose to 5.48 percent.
The 30-year Treasury bond yield was down at 4.48 percent.
Rates and bonds are current as of 7:15 p.m. Eastern Standard Time.
Mortgage rate figures are according to Bankrate.com, which publishes nightly averages based on its survey of 4,000 banks in 50 states. Points on these mortgages range from zero to 3.5.
In other economic news, the Dow Jones Industrial Average tumbled 218.35 points, or 1.66 percent, finishing at 12,958.44. The Nasdaq lost 43.86 points, or 1.66 percent.... Long Term Mortgage Rates

Campaing to help homeowners begins

An alliance created to combat a rising flood of mortgage foreclosures began a nationwide mail campaign Monday, offering help to homeowners who may be having trouble meeting their mortgage payments..... Homeowners

Campaing to help homeowners begins

An alliance created to combat a rising flood of mortgage foreclosures began a nationwide mail campaign Monday, offering help to homeowners who may be having trouble meeting their mortgage payments..... Homeowners

Countrywide Loan Production increased in October

Countrywide Home Loans
"Countrywide Financial Corp. boosted October loan production by 4 percent over the previous month, to $22 billion, funneling more than 90 percent of loan production through its banking division.
Nonpurchase loans represented the majority of mortgage loans funded in October, at $12.7 billion, with Countrywide facilitating an additional $9.3 billion in purchase loans.
Compared to a year ago, October loan production was down 48 percent, and delinquencies and foreclosures in Countrywide's $1.47 trillion loan servicing portfolio continued to grow, the company announced today.
Delinquencies as a percentage of unpaid principal balance rose to 5.94 percent, compared with 3.97 percent a year ago. Foreclosures pending rose to 1.28 percent, more than double the 0.58 percent registered at the same time last year.".....Countrywide Loan Production Increases in October

Countrywide Loan Production increased in October

Countrywide Home Loans
"Countrywide Financial Corp. boosted October loan production by 4 percent over the previous month, to $22 billion, funneling more than 90 percent of loan production through its banking division.
Nonpurchase loans represented the majority of mortgage loans funded in October, at $12.7 billion, with Countrywide facilitating an additional $9.3 billion in purchase loans.
Compared to a year ago, October loan production was down 48 percent, and delinquencies and foreclosures in Countrywide's $1.47 trillion loan servicing portfolio continued to grow, the company announced today.
Delinquencies as a percentage of unpaid principal balance rose to 5.94 percent, compared with 3.97 percent a year ago. Foreclosures pending rose to 1.28 percent, more than double the 0.58 percent registered at the same time last year.".....Countrywide Loan Production Increases in October

PMI Insurers may owe thanks to Piggy Back Mortgages

"The PMI companies pressured Congress and did get a limited short-term income tax deduction for PMI premiums but borrowers continued to flock to piggy-backs.
Well, talk about dodging a bullet. There were probably hundreds of thousands of buyers who opted for a piggy-back arrangement rather than PMI in the last half dozen years. The Federal Reserve has reported that 22 percent of new loans written in 2005 and 2006 used the second mortgage approach. Think of all of the potential foreclosures for which the PMI companies are not going to be on the hook....." Private Mortgage Insurance

PMI Insurers may owe thanks to Piggy Back Mortgages

"The PMI companies pressured Congress and did get a limited short-term income tax deduction for PMI premiums but borrowers continued to flock to piggy-backs.
Well, talk about dodging a bullet. There were probably hundreds of thousands of buyers who opted for a piggy-back arrangement rather than PMI in the last half dozen years. The Federal Reserve has reported that 22 percent of new loans written in 2005 and 2006 used the second mortgage approach. Think of all of the potential foreclosures for which the PMI companies are not going to be on the hook....." Private Mortgage Insurance

Beazer Home Builder reduces....

"Home builder Beazer reported this week that it cut 650 positions -- or 25 percent of its workforce, in October . Since peaking in March 2006, the company's workforce has been slashed by about 50 percent "through reductions in force and attrition," the company reported this week. The company referred to the major layoff and dramatic downsizing in workforce as "recent headcount reductions."
Meanwhile, an investment group that works with pension funds sponsored by affiliates of a group of unions that collectively represent about 6 million members is asking for another head to roll at Beazer: that of the CEO and president....." Inman News blog

Beazer Home Builder reduces....

"Home builder Beazer reported this week that it cut 650 positions -- or 25 percent of its workforce, in October . Since peaking in March 2006, the company's workforce has been slashed by about 50 percent "through reductions in force and attrition," the company reported this week. The company referred to the major layoff and dramatic downsizing in workforce as "recent headcount reductions."
Meanwhile, an investment group that works with pension funds sponsored by affiliates of a group of unions that collectively represent about 6 million members is asking for another head to roll at Beazer: that of the CEO and president....." Inman News blog