- Written by Worried
After the debacle over credit default swaps and derivatives, there is now a shadow cast over all forms of insurance. How do you know that you will be covered if you have to make a claim? There is a good chance that all those premiums you have been paying were all in vain.
After you signed up for life insurance or home or car insurance, your policy was aggregated together with many others and sold to yet other insurance companies. This way they share the risk (of payouts) and the rewards (your premium payments). Often, mixed up in the aggregation are some very nasty "toxic investments" or credit default swaps.
As policies get combined, the total amount covered by all these derivatives grows to staggering levels. Few individual insurance companies can cover so much risk. In other words, they don't have the reserves of capital to pay out if a perfect storm comes along.
If that was not enough, the investment banks kept selling these things back and forth, and folding in yet more "toxic investments" to jack up the prices to dizzying heights, all for the sake of profits.
When all heck broke loose, we experienced that perfect storm. The biggest of all the investment banks and insurance companies were hit hard, and are now on the ropes. They would be gone if it were not for government injections of bailout money.
So you think that you are safe if the government is involved? Think again. The money was injected without strings attached, as AIG Assurance and their executive bonuses have demonstrated. The money is not going towards covering your policies, which are still buried under a ton of default credit swaps.
When you come to renew your policy, ask your broker about who is going to cover the policy, and how much reserves they have. Find out how much they are exposed to credit default swaps. Remember when Enron went down, it kicked a bunch of banks in the teeth, and they are still recovering years later.
Think you are covered? Think again.