Another Sign of Bad Economic Times: Low Insurance Premiums

Published October 18, 2010

To high unemployment rates, soaring national debt, and slowing growth in gross domestic product, add another measure of the nation’s economic troubles—property-casualty insurance premiums.

A soft insurance market that started in 2004 has been made even mushier by the ongoing economic malaise, according to executives at the American Insurance Association and Insurance Information Institute.

“We are seeing declines in insurance premiums that are tied very much to the general economy,” said AIA Assistant Vice President David Unnewehr.

III President Robert Hartwig noted property-casualty insurance premiums have fallen since 2007. The second quarter of 2010 was the first time in 12 quarters there has been any increase in premiums, he said.

Prices at Pre-9/11 Levels
Hartwig attributes the declining premium levels largely to the soft market that started in commercial lines in 2004.

“I believe the economic effect is secondary to the soft market pricing effect, by far,” Hartwig said. “The soft market began years before the financial crisis. The soft market’s lasted longer than the prior hard market did—six years versus four years. Price levels today for commercial are where they were pre-9/11.”

Unnewehr and Hartwig agree the weak economy has made the premium decline worse.

“As people are unemployed, that’s impacted the workers comp market in particular,” said Unnewehr. “That’s based on exposure. With 10 percent unemployment, there’s less workplace exposure. That’s not good.

“On the personal lines side, people might decide to drop a vehicle from coverage, or they don’t buy as many new cars and are keeping older cars. Those kinds of small things are happening all over the country, and it’s holding premiums down.”

Dependent on Economy
Eli Lehrer, national director of The Heartland Institute’s Center on Finance, Insurance, and Real Estate, said he doubts there is anything insurance companies can do in this kind of economy to grow their business substantially.

“Property and casualty insurance is pretty much necessary. You need auto insurance to drive and property insurance to have a mortgage,” he said. “This means, on one hand, that property and casualty insurance companies will almost always share in an economy that is doing well overall. On the other, it means that no amount of marketing, service, advertising, or anything else can grow the property and casualty insurance industry
in a bad economy.”

Unnewehr said property-casualty premiums overall are down 5.8 percent since 2007. Commercial lines premiums overall are down more than 11 percent.

‘Disaster’ in Workers Comp
“Workers compensation is a disaster: more than a 22 percent decline,” he said. “It doesn’t take a dummy to realize that persistent 10 percent unemployment is not good for workers comp. Personal lines are up marginally at 1 percent over two years, and that is only because of modest growth of about 5 percent in homeowners insurance.”

He attributes most of that growth to pricing for hurricanes and other high-risk exposures.

“The bellwether growth line for more than 75 years—auto insurance—was even down by more than $1 billion, which is less than 1 percent, but still, for that entire line to decline for two years in a row is something,” Unnewehr said.

Good Loss Ratios
There is an upside, however. With less risk exposure, fewer claims are being filed. Result: healthy loss ratios.

“Loss ratios today look better than they did pre-9/11,” said Hartwig. “Companies have done a better job of underwriting, and because they have been able to release prior-year reserves into their earning streams, their results are good.”

That release of prior-year reserves results from lower claims frequency and severity, which means companies don’t need to set aside as much money as expected to cover claims.

Unnewehr said the loss ratio for all lines was 59 last year.

“That’s a good loss ratio, one of the better ones in the last 20 years,” he said. “Companies were holding and making money. It’s just that the top line is not growing. If this continues another couple of years and we have a massive hurricane or serious new claim problem, things would get dicey.”

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Finance, Insurance & Real Estate News.