Hard Markets And LIBOR Scandal
I was reading a great article on the LIBOR scandal that will likely make Madoff and the Wall Street scandals seem small at best. One of the main concerns that I hear floating around in conferences and among clients is the soft vs. hard market for Workers Compensation.
I do not want to just redo the article in the above link. One of the great quotes from the article is:
If LIBOR was manipulated, the results could be far-reaching. Since LIBOR is the benchmark for many other rates, an inaccurate LIBOR means millions of people all over the globe might have paid more or less interest than they should have. If rates were artificially low, borrowers for things like adjustable-rate mortgages and student loans would have benefited. But investors like cities, mutual funds, and pension plans may have earned less than they should have.
The extent and impact of LIBOR manipulations is still unknown. The effect on the average consumer is probably small, but as the professor in the video above opined, it could be measurable to people with large loans tied to LIBOR, like those with adjustable-rate mortgages.
As you can see, the insurance markets will likely be heavily affected overall. There are insurance investments that were tied to the LIBOR. The overseas investments of the very large carriers and brokerage houses will be affected directly.
In my opinion, the adjustments and corrections to the LIBOR will be felt worldwide. The major overseas index was manipulated so that banks/investment companies such as Barclays could make even more money.
If you notice from the above passage that any large organizations that would have benefited from higher rates received an artificially lower rate of return. The other side of the coin is to say that markets will stay soft now that the correction of the LIBOR is in place.
The overseas investments markets are now very volatile. The volatility of investment markets will make the market more susceptible to a market hardening. Insurance carriers need to have a stable market to properly set rates. One of the major considerations for setting rates is ROI (return on investment). If the markets are not stable, the carriers must look to their policyholders as being the stable element in their portfolio.
Bottom Line – I am not inferring a hard market is coming soon. Carriers may look to underwrite the safer companies, and with the changing of the E-Mod formula, a hard market acceleration could occur very rapidly. The best advice is to be prepared at renewal.
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