S&P’s downgrade could impact the nation’s insurance industry

Financial NewsRecently, Standard & Poor’s (S&P), a major financial research and analysis company based in the U.S., downgraded the U.S. government debt. The firm now classifies the nation’s finances as having a “negative” outlook. S&P’s actions have spurred the nation’s insurance and finance companies to take another look at their practices and portfolios, keen to spot any compliance violations spawned from the downgrade. The search for such violations has been slow going so far, as the U.S.’ long-term ratings have never before been downgraded.

The downgrade has left many major insurance companies to re-evaluate the state of their myriad of investments as well as their internal procedures and portfolios. Regulators are currently deliberating over whether insurers should be required to set aside capital to, essentially, insure their own investments. There have never been federal regulations mandating that insurance companies harbor money for such a purpose, but given that the value of their investments may have been significantly diminished, such regulations may be necessary.

Insurers, as well as money management companies, rely on the value of U.S. Treasurys. For insurers, the Treasurys allow them to spend money on services rather than keeping it as back-up capital. S&P’s downgrade could impact the value of Treasurys, meaning that policyholders will be put at risk of major financial losses if their insurance companies cannot accommodate such sudden shortfalls.

Tom Forester of the Forester Value Fund, a stock-mutual-fund management firm, notes that the downgrade will serve as a wake-up call for the U.S., spurring legislators to take a hard look at the enduring fiscal problems plaguing the nation.

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