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Forty billion dollars set the insurance industry back to five years in terms of its capacity to cover claims, according to a report on insurance by the Iowa State University College of Business.

Another significant disaster after 9/11 could have emptied the insurance industry’s pool of available funds, forcing companies to liquidate stocks, bonds, assets, and other investments to cover claims.

But while the terrorist attacks had a real impact on insurance, the real problems started before 9/11, as the stock market started to sour after a decade of record-setting profits.

Rather than take their cut out of the premiums they collect, insurance companies generally turn profits by investing insurance dollars. With the majority of that money in blue chip stocks, it was considered a fairly safe investment for companies, although a significant amount of the money was invested and lost on the dot-com roller coaster.

Then the blue chips also started to go bad, most notably when giants Enron, Worldcom, Anderson Consulting , Adelphia, Global Crossing and Tyco tanked as a result of investor fraud and mismanagement.

A recession, low consumer confidence and other factors also resulted in monetary losses, and the shrinking of stock portfolios. Suddenly the pool of insurance capital was a little too shallow for the large companies, who have been forced to raise rates.

According to the American-based Foundation for Taxpayer and Consumer Rights, the top 10 major insurance companies in that country lost almost $275 million on the stock market over the past few years.

Because insurance companies are having a hard time making a profit on the stock market they have had to look for other ways to become profitable. The most obvious solution was to raise premiums, generating money from customers rather than stock holdings.

Compounding the insurance industry’s woes is the fact that fewer people can afford insurance these days, and many are doing without. Younger people tend to only buy as much insurance as they need, and only when it is essential, such as auto insurance. Things like life insurance are most popular for people with families, and people are getting married later in life. House insurance is generally for homeowners, and many people can’t afford to buy, or are settling down later.

While Canada was immune to some of these effects, the fallout has been felt on our side of the border. Our own stock markets generally keep pace with the American markets, albeit on a much smaller scale, and have been hit by everything that is affecting the U.S. The multinational nature of the leading insurance and reinsurance companies in Canada and the U.S. also means the problems could not be contained to one country.