A U.S. government shutdown, which would have an immediate impact on the economy, also could directly affect insurers, though the severity would largely hinge on the length of time before Congress reaches a budget agreement, according to a new AM Best commentary.
Historically, government shutdowns have been relatively brief, with the resulting economic impact being minor. However, the Best’s Commentary, “Impact of US Government Shutdown on Insurance Industry Will Depend on Duration,” notes that the National Flood Insurance Program (NFIP), administered by the Federal Emergency Management Agency (FEMA), is up on Sept. 30. Without reauthorization, property owners, and to some extent, renters, will either forego flood insurance (if the property is owned outright with no encumbrances) or be forced to find insurance in the private market.
“Closings on properties requiring flood insurance would be delayed, as would new Federal Housing Administration loans, which would impact property sales and purchases of property insurance and title insurance,” said Christopher Graham, senior industry analyst, Industry Research and Analytics, AM Best.
The potential for short-term losses and volatility in the capital markets would increase with a shutdown. If the shutdown is lengthy, AM Best would expect to see a pick-up in flight to quality on investment assets, particularly in the Treasury market, where prices could rise anywhere from 50 to 100 basis points. For fixed income, this would mean an increase in allocations to investment-grade over high-yield, and in common stocks, more defensive sector purchases. Disruptions to the commercial real estate sector likely would negate improvements seen so far in 2023.
To access the full copy of this commentary, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=336221 .