NY Auto and Home Insurance in the Financial Crisis

By Aaron J. Stein

Greetings, all. Like most small businesspeople these days I have been very busy trying to make sure I do those things necessary to keep our office busy and profitable in tough economic times. So I thought this would be a good time to talk about how the financial crisis is affecting the insurance companies.

We have all been reading about the failure of many Wall Street firms and banks. Some even have divisions in the insurance business such as AIG whose a widely publicized problems have many people worried because of their insurance policies with various parts of that group. However while banks and brokerage firms were de-regulated a number of years ago which is part of the reason for the current mess, the same is not true of the insurance business.

Insurance is one of the most heavily regulated businesses and New York in particular is considered the model for other states and around the world in keeping New York insurance companies solvent and able to pay their claims. Even in AIG, it is the parent holding company not the insurance units that are having problems.

As long as you were insured with a New York licensed insurance company you would have nothing to worry about in terms of whether claim would be paid up to $1 million, which is a guarantee that is part of the New York State insurance guaranty fund. And if you are one of those people on Long Island who have coastal or waterfront property and have been forced to get your insurance with an unlicensed carrier such as Lloyds of London or any number of other carriers out there, you are probably even safer because these companies have been managed for the long-term as opposed to the short-term money making goals of some of the big American financial companies which is what caused them to get in trouble.

One of my biggest fears about the insurance industry is that up until recently, there was a lot of talk about deregulation for insurance. What we have seen in this financial crisis is that deregulation leads to sacrifice of long-term viability in favor of short-term profits. That might be fine if you are talking about selling TV sets, but insurance simply must be based on a longer-term perspective including reserves for catastrophes that might only happen every 50 years. If we allowed the same sort of short-term thinking that led the large brokerage houses to package up toxic loans and sell them to people and then run with their commissions, we could easily cause a similar disaster in the insurance business by allowing people to suck out this money instead of putting part of it away for long term catastrophe management.

What we are seeing is a huge drop in value of all stocks in the financial sector based on the problems of the banks and brokerage houses. There really is not much reason for this in the insurance industry but there are probably some great bargains to be had on their stocks right now because they have been trampled with the rest of the sector.

But for the average person just wondering if they would get paid if they needed to put in a claim on their flood insurance or homeowners insurance (or car insurance for that matter) then the answer is that in general there should be nothing to worry about and the vast majority of insurance companies have plenty of money to pay claims. What we will most likely see is some consolidation of companies who do have very strong balance sheets who will be out there looking for other companies they can buy at bargain prices.