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Towers Watson Study: Insurers Weigh Impact over Portfolios, Interest Rates As Congress Battles Over Debt Deal

Posted on 02 Aug 2011

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As they watched Congress struggle to put a debt deal in place by the Tuesday, Aug. 2 deadline, U.S. insurers cited concerns over their companies' portfolios, short- and long-term interest rates and a decline in equity markets, according to a survey from global professional services company Towers Watson.

The leading concern among insurers in the July 28 – 29 survey was a possible decline in capital (37%), followed by a lack of market liquidity and stock market volatility (both at 26%) should Congress fail to reach an agreement.

More than three-fourths of the insurers (80%) who responded said they expected a slight or even moderate increase of up to 100 basis points in short-term rates if no debt agreement is reached. Only 14% said there would be no impact on short-term rates. While insurers said the impact on long-term rates would be similar, they were slightly more pessimistic in their outlook: 34% believe long-term rates would rise slightly (less than 50 basis points), 28% believe they would rise moderately (50 to 100 basis points), and 23% believe rates would increase significantly (more than 100 basis points).

The overwhelming majority of U.S. insurers (91%) said an agreement on the debt deal would not impact their companies' credit ratings.

President Obama and congressional leaders Sunday night agreed to a plan to raise the federal debt limit that includes sharp spending cuts but no new taxes. It breaks a political logjam that raised concerns about a possible government default. The plan awaits Senate and House approval before taking effect.

"Insurance companies have proven to be quite adept at managing the myriad risks confronting them, and this current situation regarding the debt deal is no exception," said Tricia Guinn, managing director of Towers Watson's Risk and Financial Services business. "Moving forward, they should continue to be proactive and seek additional risk management opportunities in this fluid environment." Most respondents believe credit spreads would increase if a debt deal was reached, according to the survey. While 20% said they expect rates to increase across the board, 45% expect rates would increase, but would affect higher-quality issues less. Only 9% said lower-quality issues would be affected less; 9% also said that there will be no impact on credit spreads.

All insurance executive respondents asserted the equity markets would decline if a deal is not in place, although the magnitude of the expected decline varies: 37% believe the decline would be slight (less than 5%), 52% believe it would be moderate (5% to 10%), and 11% believe it would be severe (more than 10%).

"There is still some amount of trepidation among insurers with regard to capital losses and market volatility," said Carl Hess, Towers Watson's global head of investment. "A debt deal could give some much-needed relief to the equity markets."
About the survey

Thirty-five senior executives from the U.S. insurance industry responded to the Towers Watson survey, which aimed at gathering their views on how insurers would be affected if the U.S. defaults on its loan obligations. The online survey was conducted on July 28 and 29.