NU Online News Service, Aug. 9, 3:05 p.m.EST

While Standard & Poor's recent downgrade of U.S. long-termsovereign debt is not expected to have a meaningful direct impacton property and casualty insurers, the indirect impact of thedowngrade, as a reflection of economic uncertainty, could be moresignificant and could prolong the soft market cycle, according toALIRT Insurance Research.

ALIRT notes that the direct impact of the downgrade “is really aside-show, with no meaningful direct manifestations.”

But, the independent analysis firm adds, the downgrade “islargely the reflection and not the cause of ongoing financialturmoil in both global economies and capital markets. It isprecisely this uncertainty and the possibility of equity and creditmarket retrenchment/double-dip recession that has the greatestimpact on U.S. insurers.”

Weaker economic conditions, including a possible double-diprecession, could cause investment losses in bond, direct mortgageand equity holdings, leading to weaker profitability for insurers,ALIRT contends. 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 balk at priceincreases.”

The firm notes that lower equity markets could result in directinvestment losses for insurers, and cause potential buyers to deferpurchases.

“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.”

Meanwhile, Senate Banking, Housing, and Urban Affairs CommitteeChairman Tim Johnson (D-SD) released a statement calling S&P'sdowngrade “irresponsible.”

“In the minds of serious, reasonable, and informed individualsthere is no doubt that the U.S. will meet its debt obligations andwe are seeing even more proof of that today,” he says. “As thefinancial markets stumble, investors continue to regard Treasurydebt as a safe haven in times of economic uncertainty.”

He states, “I am deeply disappointed in S&P's decision toenter into the game of political punditry.”