The China Banking Crisis and Insurance Markets
The China banking crisis that is supposed to arrive on January 31st may have an effect on US insurers. A few articles over the last three month warned of a possible money crunch in China. An article appeared in some of the fringe economic analysis websites such as this one concerning a January 31st mega default on loans back by a Chinese bank.
The link in the first paragraph is to a website that looked to be more alarmist than truthful. This article from Forbes on the same China default gave the alarmist website credibility very quickly. This situation may never occur with the world’s largest bank on January 31st. Then again, it is a pending matter.As mentioned in this article on what actually drives insurance carriers’ rates , the rate of investment return will dictate much of the insurance carriers’ premium levels. If any company’s investments are lagging due to low investment rates, the shortcoming is usually balanced with an increase in prices. Insurance carriers are no different.
The other side of the coin is the debt owed by insurers to China. The level of debt owed to China has now reached record levels as of five days ago. Most of the debt is incurred by US banks. One has to think that insurers are in step with debt owed by the major bank.
At some point if China is experiencing bank defaults or reaches its limit of lending to the US, a money-tightening will occur no matter how much the Fed is pumping into the economy. Money scarcity among banks will also cause the insurance marketplace to harden in a very short time.
If there is enough of a funds scarcity, the insurers will have to begin cherry-picking their client base. The only way for carriers to be able to make up for the lack of funds is to reduce their risk. No one can blame them after the last financial crisis.
Next up – Preparing For A Hard Market – easier than you may think….
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