Would you Like your Insurance Company to Accept Government Aid?

The federal government has offered bailout funds to important financial companies, including insurers. These funds are available in the form of TARP, Troubled Asset Relief Program. Six large insurers are eligible to receive up to $22 billion in loans made on very attractive terms. Such injection of funds is intended to make insurers healthier and less likely to succumb to the economic problems.

However, one insurer, Ameriprise Financial (better known under its former name, American Express Financial Advisors) has already rejected this offer of help. Two more insurers, Allstate and Prudential Financial, are hesitating.

The reasons are familiar to those who were following recent news about the banking industry. Many banks accepted federal help, only to realize that it comes with a hidden price tag: government intervention in the business affairs. Another problem is that the public believes any company that accepted aid money is in trouble; and Ameriprise management considers the company perfectly healthy. Many analysts don’t agree with that opinion, and maintain a sell rating on its stock.

If you are choosing an insurance company, should you care about this issue? Perhaps yes. After all, any extra funding makes your insurance company more stable and reduces the chance of future problems smaller. There is no such thing as “too stable.” The reason some companies reject the funding is because they are worried about their own stock performance and the government’s ability to stop payment of large bonuses to its executives. Generally, you would be better off choosing an insurance company that does accept government help as long as their premiums are competitive.

After all, the management of the insurance company works for the shareholders, not for the customers. So it often takes as much risk as possible by keeping its capital at a minimum a benefit for the shareholders, but a disadvantage to you. The government aid program happens to be in your interests, as an insured.