Auto Insurance in the Driverless Era: How Enterprises Will Adapt

 

The bond funding mix is changing for insurers, and it’s going to have big implications down the road. In this article, we’ll go over the difference between traditional and alternative bond funds, what types of changes we can expect to see in the insurance industry and how this might affect you as an insurance customer. We’ll also discuss what you can do to ensure that your insurance portfolio stays strong even if the financial environment changes. Let’s get started!

Looking to raise capital? The mix of bond funding in the insurance industry is changing, and that could impact the way you think about your fundraising strategy in the future. Here’s what you need to know about this shift and what it means for your ability to access the capital you need going forward.

 

How monoline bond insurance works

There are many types of bond insurance, but monoline bond insurance is a type that has been used for decades to protect municipal bonds. Essentially, the backer of a municipality’s bond transaction may request monoline bond insurance to protect their investment if the issuer defaults on their bonds. Monoline bond insurance functions in a similar way to surety bonds in other industries, where an individual or company pledges a percentage of their credit as collateral to cover losses incurred by one party. When losses exceed this collateral sum, financial markets have no requirement or obligation to provide any additional funds: monoline will cover everything. But with interest rates on the rise, investors are turning away from long-term debt obligations. Consequently, fewer companies are opting for traditional bonds with 30-year maturities in favor of shorter-term paper with 10 years or less. The average duration of insured corporate bond deals (the amount of time before they mature) has decreased significantly since 2010 from 5.5 years to 3.2 years between 2013 and 2017. As a result, when there's less interest in traditional investments like fixed income securities, the liability to pay off those liabilities falls back onto monolines instead - which leaves them vulnerable when there's high demand for protection amidst low supply.

 

Monoline bonds are going through a change

Because of economic headwinds, like volatile interest rates, large or regional companies that typically issued these bonds have had to seek higher-quality debt at more competitive rates, meaning they can't issue as many bond types as they did in previous years. This trend has created opportunities for other companies in some cases while limiting choices in others.

What does this mean? That monoline bond availability will change over time. These changes could affect insurance pricing differently based on which bond type will be most widely available at any given time. For example, if there are a lot of bonds from regional carriers available but few bonds from larger ones, then prices for those bonds might go up. But if there are plenty of bonds from both large and regional carriers, then prices might not increase. Either way, bond quality impacts price; and your carrier's choice to fund its business with certain bond types will determine how much you pay for coverage. If a company only issues bonds with high ratings, then their premiums may be lower than one issuing lower-rated bonds. Conversely, if an insurer issues more monoline (higher risk) bonds instead of straight fixed rate (lower risk) debt, the premiums may cost less.

 

What does this mean for reinsurers?

The bond fund mix is changing in insurance companies. Investors are demanding higher yields, which are generating some unpleasant effects. As investors demand more high yield bonds, investors may become less interested in buying more lower-yielding bonds of insurance companies. This can have an impact on reinsurers. Because reinsurers do not always have as large balance sheets, when a significant amount of money moves out of lower-yielding bonds because they are traded at such a high price, this will cause an increase in volatility from bond prices. This change will affect all sectors that use insurance to protect against losses - without the protection of reinsurance these costs will be too expensive to insure risk from unknown sources. Higher interest rates for investment funds also impacts the borrowing cost for businesses seeking loans. Increased competition from banks with access to cheaper funds may force up interest rates. Higher interest rates also lead to inflation, which hurts economic growth. It’s important that people keep up with changes in these market dynamics so they can understand how they will effect their investments and financial well-being.

 

How will these changes affect your firm?

The bond funding mix is changing for insurers. The three main types of bonds that were once used are falling in importance while variable rate bonds are on the rise. These changes are largely being driven by companies' needs to match their sources of funding with their risk profile in order to reduce costs, maintain liquidity, and help keep their rating agencies happy.

You'll be affected by these changes because they can affect your firms' risks of losses as well as how much money you'll have on hand. In addition, large investments may be required when companies need to replace maturing bonds or decide which type to issue next. These new investments will tie up cash in case an emergency pops up but also yield a higher return than some older bonds used in traditional financing mixes. While this trend is occurring among many companies, not all are taking advantage of it. It's important to look at the trends affecting your company now so you're prepared for any upcoming financial challenges. Reviewing where your firm stands on different metrics like its capitalization ratios, credit ratings, and interest rates can give you insight into what direction you should take moving forward.

 

Some of the biggest insurers in the US are looking to cut back on their use of bonds as funding sources, and are instead turning to an unlikely source: banks. This change from the industry norm could represent a significant opportunity for some financial institutions, so they’re paying close attention to how the bond funding mix is changing for insurers. Here’s what you need to know about this trend, and why it’s important that you do too if you’re thinking about becoming an insurer or offering financial services to insurers.