Effects of the Crisis Were Limited Largely to Certain Products and Lines of Insurance

The financial crisis generally had a limited effect on the insurance industry  and policyholders, with the exception of certain annuity products in the life  insurance industry and the financial and mortgage guaranty lines of  insurance in the P/C industry. However,  the crisis did affect life insurers that offered variable annuities with  optional guaranteed living benefits (GLB), as well as financial and  mortgage guaranty insurers—a small subset of the P/C industry. Finally,  the crisis had a generally minor effect on policyholders, but some  mortgage and financial guaranty policyholders received partial claims or  faced decreased availability of coverage. The Financial Crisis Had a Limited Effect on Most Insurers’ Operations

			Insurers Experienced Some Capital and Liquidity Pressure, but Insolvencies Were Limited

Many life insurance companies experienced capital deterioration in 2008,  reflecting declines in net income and increases in unrealized losses on  investment assets. Actions by State Regulators, Federal Programs, and Insurance Business Practices Helped Mitigate Some Effects of the Crisis

Multiple regulatory actions and other factors helped mitigate the negative  effects of the financial crisis on the insurance industry. NAIC also provides services to  help state regulators—for instance, maintaining a range of databases and  coordinating regulatory efforts. State regulators said they used  these reports during the crisis. Although this change in methodology did result in a change in RBC  charges for more than half of insurers’ RMBS holdings, the change did  not significantly affect insurers’ financial statements. A variety of insurance business practices may have helped limit the  effects of the crisis on most insurers’ investments, underwriting  performance, and premium revenues. Regulators Have Continued Efforts to Strengthen the Regulatory System since the Crisis

State regulators and NAIC efforts to strengthen the regulatory system  include an increased focus on insurer risks and group holding company  oversight. ORSA is an internal assessment of the risks  associated with an insurer’s current business plan and the sufficiency of  capital resources to support those risks under normal and severe stress  scenarios. One state regulator stated that the revised Insurance Holding Company  System Regulatory Act was expected to make group-level holding  company data more transparent to state insurance regulators. Also, most states  have yet to adopt revisions to the Insurance Holding Company System  Regulatory Act. However, some insurance  associations we spoke to voiced concerns about the increased oversight  of holding companies, and some insurance associations and insurers also  questioned the need for additional regulatory changes. Appendix I: Objectives, Scope, and Methodology

This report examines (1) what is known about how the insurance industry  and policyholders were affected by the financial crisis, (2) the factors that  affected the impact of the crisis on insurers and policyholders, and (3) the  types of regulatory actions that have been taken since the crisis to help  prevent or mitigate potential negative effects of future economic  downturns on insurance companies and their policyholders.
Why GAO Did This Study

Insurance plays an important role in ensuring the smooth functioning of the economy. Concerns about the oversight of the $1 trillion life and property/casualty insurance industry arose during the 2007-2009 financial crisis, when one of the largest holding companies, AIG, suffered severe losses that threatened to affect its insurance subsidiaries. GAO was asked to examine any effects of the financial crisis on the insurance industry.
This report addresses (1) what is known about how the financial crisis of 2007-2009 affected the insurance industry and policyholders, (2) the factors that affected the impact of the crisis on insurers and policyholders, and (3) the types of actions that have been taken since the crisis to help prevent or mitigate potential negative effects of future economic downturns on insurance companies and their policyholders.
To do this work, GAO analyzed insurance industry financial data from 2002 through 2011 and interviewed a range of industry observers, participants, and regulators.

What GAO Found

The effects of the financial crisis on insurers and policyholders were generally limited, with a few exceptions. While some insurers experienced capital and liquidity pressures in 2008, their capital levels had recovered by the end of 2009. Net income also dropped but recovered somewhat in 2009. Effects on insurers' investments, underwriting performance, and premium revenues were also limited. However, some life insurers that offered variable annuities with guaranteed living benefits, as well as financial and mortgage guaranty insurers, were more affected by their exposures to the distressed equity and mortgage markets. The crisis had a generally minor effect on policyholders, but some mortgage and financial guaranty policyholders--banks and other commercial entities--received partial claims or faced decreased availability of coverage.
Actions by state and federal regulators and the National Association of Insurance Commissioners (NAIC), among other factors, helped limit the effects of the crisis. First, state insurance regulators shared more information with each other to focus their oversight activities. In response to transparency issues highlighted by American International Group, Inc.'s securities lending program, NAIC required more detailed reports from insurers. Also, a change in methodology by NAIC to help better reflect the value of certain securities also reduced the risk-based capital some insurers had to hold. To further support insurers' capital levels, some states and NAIC also changed reporting requirements for certain assets. These changes affected insurers' capital levels for regulatory purposes, but rating agency officials said they did not have a significant effect on insurers' financial condition. Several federal programs also provided support to qualified insurers. Finally, insurance business practices, regulatory restrictions, and a low interest rate environment helped reduce the effects of the crisis.
NAIC and state regulators' efforts since the crisis have included an increased focus on insurers' risks and capital adequacy, and oversight of noninsurance entities in group holding company structures. The Own Risk and Solvency Assessment, an internal assessment of insurers' business plan risks, will apply to most insurers and is expected to take effect in 2015. NAIC also amended its Insurance Holding Company System Regulatory Act to address the issues of transparency and oversight of holding company entities. However, most states have yet to adopt the revisions, and implementation could take several years.