While the U.S. government has avoided a federal shutdown, a recent AM Best report highlights the potential impact a shutdown could have on the insurance industry, were it to happen in the future.
Fortunately, both the House and Senate agreed on a short-term funding deal ahead of deadline, avoiding something which has only happened five times over the past three decades, the most recent being a 34 day shutdown starting in December 2018.
Prior to the agreement being reached, AM Best released a report discussing the potential impacts of a U.S. government shutdown on the insurance sector.
“The economic consequences of a short shutdown are minor and relatively contained, but there is greater uncertainty surrounding a longer shutdown,” said AM Best.
“The shutdown could affect the title, property, and private flood insurance segments, as well as funding for the National Flood Insurance Program. Insurers may make changes to their asset allocations, shifting to investment-grade from high- yield investments,” added the rating agency.
The ratings agency warned that failure to come to a funding agreement would have had an immediate impact on the economy, with consequences varying in severity depending on the length.
For insurers specifically, AM Best warned that NFIP funding could be exhausted, and closings on properties requiring flood insurance would have been delayed, which in turn impacts the purchase of property insurance and title insurance.
Another potential impact on the insurance sector concerns the asset side. Citing previous shutdowns, the ratings agency noted a modest impact often limited to a rise in price volatility, which in turn drives a flight to quality.
“For fixed income, this would mean an increase in allocations to investment-grade over high-yield, and in common stocks, more defensive sector purchases,” said AM Best.
The last-minute deal agreed by the House and Senate runs until November 17th, 2023, but given its temporary nature, the drama is likely to be repeated ahead of its expiration.
