The subprime disaster is hitting insurers hard with Fitch Ratings saying US life insurers have an estimated $7 billion to $8 billion in unrealized losses on subprime, reports The Wall Street Journal. There are several reasons why insurers will be the next big victims. For a start, life insurers have a greater exposure to mortgage securities, says TheStreet.com's Simon Constable. Which raises serious questions about the risk management strategies at insurance companies that, you would think, should know better.

But why is this important? Simply because of the flow through effect on the market.

As the New Yorker's James Surowiecki pointed out in an excellent column this month, one of the curious features of bond insurance is that insurers' credit ratings get automatically applied to any bond they insure. A rating of AAA is enjoyed by all but it also works in reverse. If they get downgraded, the bonds they've insured will lose their ratings as well. So everyone suffers.

"That's why so many people on wall street are pushing for a bailout for the insurers,'' writes Surowiecki. "It may be an abandonment of free-market principles, but no one has ever accused the Street of putting principle above profit. Normally when companies make bad decisions and fail to deliver value, it's just their workers and investors who suffer. But monoline insurers' desire to grab as much new business as they could, risks be damned, quickly radiated across global markets and will have huge consequences for millions of people who have never heard of M.B.I.A. or Ambac".

So now the push is on to strike rescue deals, with either bailouts or forced break-ups into good books, like backing those sleepy, low-risk municipal bonds and bad ones in the form of collateralised-debt obligations and other debris.

Bond insurer Bond insurer Financial Guaranty Insurance Corp is now demanding it be done, reports CNN Money.

But it's risky as it could result in a wave of lawsuits, warns The Economist. Still as Surowiecki says, when did Wall Street ever put principles above profits?