Executive Summary
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Why the insurance sector came out of the downturn better than the banks.
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The important effect the yield curve has on insurance liquidity and the real economy.
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The need for Governments to act on a number of fronts.
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The shift in wealth from savers to spenders.
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The importance of not rushing to judgement on regulatory matters.
Introduction
If one looks at the devastation wrought on the global finance community, there is no doubt that the insurance sector has come out of this in very much better shape than the banks. There have been casualties—AIG in the United States, for example. However, AIG was a special case, being much more of a financial conglomerate than a “pure” insurance company.
The reasons why the insurance sector has been less affected by the financial services “meltdown” are complex. An important factor is that there was no parallel to the way the banks—and the shadow banking system that sprang up in recent years—leveraged themselves. Relying on a constant supply of new funding to keep their business models running meant the eventual liquidity crunch left certain banks high and dry.
This does not mean that the insurance sector does not have issues to face in the future. It will have to deal with the aftershocks of the economic downturn, with weakness and volatility in the stock, bond, and property markets, or with movements in annuity rates, all of which will pose serious challenges.
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