Insurers and reinsurers will not likely see a direct impact fromStandard & Poor's recent downgrade of U.S. long-term sovereigndebt, experts say, but the underlying economic conditions that ledto the downgrade could cause some of the same issues experienced in2008 to re-emerge. 

Insurance Information InstitutePresident Robert P. Hartwig says the downgrade has no impact on thesolvency of insurers or their claims-paying ability. He notes thatU.S. Treasury accounts for 6 percent of invested assets, making ita minor position in the overall financial picture for insurers.

Hartwig also says the National Association of InsuranceCommissioners (NAIC) issued a statement saying there would be noimpact on insurers' investments and that risk-based capital andasset-valuation reserves would be unaffected. He explains that thismeans insurers do not have to worry about putting up more cash forreserves. 

The Aug. 5 action by S&P to downgrade the U.S. sovereignrating by one notch from “AAA” to “AA+” is “trivial,” Hartwig says,compared to the market disruptions three years ago, and he addsthat Treasury bonds still remain the “safest security in the world”for investors.

In its statement, the NAIC says it sees no current impact oninsurers' capital, but it would “consider changes to our regulatorytreatment if it becomes necessary in the future.”

Reinsurance broker Guy Carpenter issued a report saying it alsosees no impact on the P&C industry. Guy Carpenter illustratesthe point by noting that in an S&P European model where theU.S. rating dropped to “AA-,” capital charges moved upward only byabout 0.3 points.

Guy Carpenter did say that if the downgrade further weakens theU.S. dollar, foreign companies could look to target U.S. carriersfor acquisition.

Financial analysts also were not pushing the panic button intheir evaluations of the P&C industry.

Sandler O'Neil Research says in a note that the “impact on theinsurance industry is reasonably modest.” The biggest impact wouldbe on carriers' portfolios that hold U.S. government debt.

UBS's Brian Meredith says insurers view the downgrade as a“business risk.” The extent of action by carriers would be toreduce “their exposure to government and government-agencysecurities within their fixed-income portfolios.”

Independent insurance-analysis firm ALIRT says the direct impactof the downgrade “is really a sideshow, with no meaningful directmanifestations.”

But, the firm adds, the indirect impact could mean weakerinvestment returns, fewer insurable exposures and possibly aprolonging of the soft commercial market. 

ALIRT says the downgrade “is largely the reflection and not thecause of ongoing financial turmoil in both global economies andcapital markets. It is precisely this uncertainty and thepossibility of equity- and credit-market retrenchment/double-diprecession that has the greatest impact on U.S. insurers.”

Weaker economic conditions could cause investment losses inbond, direct mortgage and equity holdings, leading to weakerprofitability for insurers, ALIRT contends. The firm notes thatlower equity markets could result in direct investment losses forinsurers and cause potential buyers to defer purchases.

 Additionally, further economic struggles could alsoincrease unemployment, which could impact group medical healthsales for P&C and health insurers, ALIRT adds.

ALIRT also says a weaker economy could have “an especiallyadverse impact on P&C insurers if it defers a likely neededturn in commercial-lines pricing, as supply for product wouldcontinue to exceed demand and insurance buyers [would] balk atprice increases.”

“In short,” ALIRT concludes, “more than three years after theonset of the financial crisis, the macroeconomic conditions thatdirectly impact insurers both on a revenue-generation and earningsbasis appear to be once again in great flux. The downgrade of theleading economic power's sovereign debt only exacerbates currentglobal financial anxiety.”

In a recent S&P conference call discussing its decision,analysts David Beers and John Chambers emphasize that the reasonfor the downgrade decision was the political inability of U.S.leaders to take the initiative and find a solution to the debtproblem.

The United States rating could return to “AAA” status when thereis broader fiscal consensus and a “robust” fiscal package agreedupon in Washington, the analysts say.

They made a point of noting that no country with an “A” ratinghas ever defaulted on their investment-grade bonds.

Meanwhile, Moody's recently reaffirmed its “AAA” rating of theU.S. credit strength rating, saying that further measures tocontrol the U.S. debt are necessary.

Moody's says downgrade could be triggered before 2013 if thefederal government fails to agree on a plan that keeps the federaldebt to GDP ratio from peaking “not far above the projected 2012levels of near 75 percent by the middle of the decade and thendeclining over the longer term.”