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Will Government Downgrade Affect Annuities?


Ten insurance companies had their ratings downgraded by Standard & Poor’s after the government debt rating was downgraded.  In the Insurance Networking News article “Insurers Not Sweating Market Turmoil,” Bill Kenealy says that there will be little impact on insurance companies due to the downgrade and market sell-off that followed.  The Insurance Information Institute says that the operations of U.S. insurance companies are not likely to change because of the downgrade.  Insurers have conservative investment strategies and excellent business plans that will protect them from the market downgrade.  They also don’t have a lot of exposure to the U.S. bond market, making the downturn in U.S. bonds less significant.

With hundreds of billions of dollars as a back up for any unanticipated claims, the strength of insurance companies should not be a concern to policyholders right now.  A large financial cushion and a mere 6% of their total market investments being exposed to U.S. Bonds makes insurers stable.  Life insurers who sell annuities belong in this grouping as well, however they do have to prepare for a rise in interest rates.  If rates rise too fast, some of the fixed annuity rates could make for a devaluing of fixed income assets.  Insurance companies prepare for these risks though and are not concerned at this time.  The Insurance Information Institute says that policyholders, anyone filing insurance claims, and new insurance and annuities customers won’t see any insurance affects from the government’s downgrade.

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