Insurance consultant Towers Perrin reported yesterday that the current financial crisis may have cut the industry's surplus – an important measure of claims-paying capacity or capital – by over 40 billion in the 3rd quarter. The firm also projected an 80 billion reduction in surplus for the year. See a press release about the report here.
- Stock market losses in companies' investment portfolios.
- Catastrophe losses incurred during a hurricane season that produced 15 Atlantic storms and 15 in the Pacific.
- Deteriorating underwriting results during a prolonged period of depressed insurance rates (known in the business as a "soft market").
Now, compared to crises in the banking and investment sectors of the economy, the insurance industry is in good shape. Because its purpose is to transfer risk from its clients, insurers have been held to a much more conservative reserving standard than those businesses. They must have a strong financial safety net to allow them to pay claims, even in the worst of circumstances.