Friday, July 03, 2009

The end of the happy insurance era...

It seems a small matter, especially in an era of frequent price advances, but I think something else is going on in the insurance world.  State Farm has announced an average increase in premiums for homeowners insurance in Illinois of 13%.

State Farm stressed that, despite the coming increase, overall rate levels have declined an average of 4.1 percent over the past five years.

State Farm's recent homeowners rate history is as follows: 2008, an average increase of 2.6 percent; 2007, an average drop of 3 percent; 2006, an average hike of 1.7 percent; 2005, an average decrease of 1.5 percent; and 2004, an average decline of 3.7 percent. [More]

This careful comparison to previous premium decreases is the key to understanding what may be happening. Insurance companies have for the last few years been able to invest our premium dollars for pretty lucrative returns.

No more.

Not only that, but I would guess most of the investment gurus at those companies are scared poopless of encountering more investment disasters like CDS's and such.  So for the time being, I think they are settling for really, really safe places to put money.

That would be a very short list.

The upshot is, premiums will have to reflect more of the true cost of the risk.  Add in the fact that risks of all kinds are increasing.  I have always believed properly priced insurance of any type should constitute a tricky decision for the buyer.  If it's a slam dunk, something is fishy with the arithmetic OR somebody else is picking up the tab.

This is why crop insurance advocates who want "actuarially sound" insurance might want to pause for reflection.  Without the massive subsidies, places that see claims year in and year out would have premiums that would cause nosebleeds.
Here's an especially fast growing leg: Crop insurance. The Ag Department's cost to underwrite it, usually a small slice of crop supports, will top 40% of the $16.8 billion in 2009 payments. Why? Insurance costs rise along with crop prices, boosting the dollars for premiums, indemnities and margins for insurers that sell the insurance (margins are based on the volume of crop insurance). While the program covers no more farms than it did in 2005, its coverage value has doubled to $90 billion. Gains for insurers have nearly doubled as well.

The response in Washington? Big whoopin' deal. Crop subsidy payments will come to 0.001% of next year's budget. You think Obama or congressional bosses will waste political capital on that, or risk angering influential farm and rural lobbies in Washington over such a piffle?

Don't look for any appreciably tighter caps on farm subsidies soon and not more than window dressing on for the profits of crop insurers. They sell the coverage for USDA, which will try to tie insurers' profits to operating costs and not gear their allowances to the volatile annual levels of insurance coverage when they wrap up a new five-year agreement with insurance companies next year.

The recent Senate budget resolution calls for cutting $70 million a year from crop insurance overall costs. That's hardly enough for the insurers to notice. And it surely won't come off benefits to farmers, whose premiums pay less than 50% of their claims. [More]
 Without investment income to offset actually losses, insurance companies have to pay attention to those wild and crazy actuaries who crunch the numbers for them. The numbers don't lie.

At the same time, the insurance industry thinks they have been over-regulated out of their profits.

Several government insurance agencies that have charged low premiums to financial firms are now expected to start raising their rates in an effort to compensate for growing shortfalls caused by the recession, according to The Globe.
Agency officials say the increases in premiums are likely to be passed on to consumers in the form of increased interest rates on loans, lower interest rates on savings accounts and higher bank fees.
The Globe said the reason for the expected premium hikes is years of overly-low rates charged by the agencies during the past 10 years, during which lobbying groups have driven the premium increases down to nothing by appealing to Congress. [More]

So my guess is we should factor in about 10% to the average of our insurance costs.  Excepting health insurance - that one could be much higher.

1 comment:

Brandon said...

I have also heard that in a bad economy people file more claims, instead of skipping it or paying out of pocket when things are good. Talking about car insurance specifically here.