Riding the Insurance Wave

Catch the Wave

Insurance has been an extremely profitable business for the past four years. Even in 2005, the year of Hurricane Katrina, net profit for the U.S. property and casualty industry as a whole topped $40 billion. Thanks in part to quiet hurricane seasons for the past two years, profits hit a record $68 billion in 2006, according to ratings agency A.M. Best, and remained above $60 billion last year.

But while some consumer advocacy groups point to those profits as evidence that premium rates are inflated, the industry insists that the national market is soft, with rates low and continuing to fall. Thanks in part to a state-sponsored initiative in hurricane-prone Florida, premiums are dropping even there.

Those record profits themselves are one reason for falling rates. Johnson observes that the carriers “have built a capital base that allows them to grow their property and casualty business with less regard to rates and costs.”

But the main reason for the soft market, especially in the Midwest, is competition. After a string of costly hurricanes in 2004 and 2005, many insurance carriers galloped away from Florida and the Gulf Coast and began to write more business in states like Minnesota, where natural disasters are pretty much limited to tornados and hail storms. “Carriers have flocked to the Midwest because of its low catastrophe exposure and its good loss history,” notes Tom Ademite, managing director of Minneapolis insurance agency The Stanton Group.

Barring calamities on the order of major hurricanes or earthquakes, most sources expect the soft market to continue for at least the next 18 to 24 months. But the seeds for an eventual hardening are already in the ground. Medical costs are rising 8 to 10 percent annually while workers’ compensation premiums remain stagnant. “That can’t last,” Johnson says flatly. And with the stock market wheezing and interest rates low, insurers are making less money on their investments. “That CD that earned you 4 percent last year and now it gets 1.5 or 2 percent? Carriers have got the same issue,” he says.

When the market hardens, the cost of being perceived as a bad risk will return. A company with a good claims history and impressive risk management programs in place might see its premiums rise by 6 percent, Johnson says. Its mediocre neighbor might face a premium hike of 20 percent. And for an account that looks like an outright dog, the sky is the limit.

Managing Risk

When rates are low, competition for your business is high, and carriers are willing to overlook some losses and problems. In other words, “Your insurance program just isn’t a squeaky wheel,” Thomas says. Most likely to succumb to the temptations of sloth, he says, are small, fully insured companies with low deductibles, such as some firms in the construction and hospitality industries. “When somebody else, is taking the full risk, the focus can tend to stray.”