Head's up, insurers! You're going to have a ton of explaining to do if another monster hurricane or terrorist attack doesn't come along to wipe out tens of billions of your premium dollars. The stage was already set this weekend, when The New York Times ran a story, headlined “Earnings For Insurers Soaring,” which reports to the general public what the industry itself has known for quite awhile now–that “insurance companies are expecting record profits in 2006 after predictions of another year of devastating hurricanes have so far come to naught.”
Do insurers need to apologize for making money, especially since profits were sky-high for 2005 even after last year's record hurricane losses? Certainly not. It's the job of underwriters, after all, to write at a profit.
However, to avoid having regulators and lawmakers at the state and federal level coming down on them like a ton of bricks, they need to show that they are underwriting rationally–that prices are dropping for most commercial insurance lines, while rising fairly for coastal properties, residential or business, and for a good reason, since that is where the biggest exposures lie.
Will the government buy this? Probably not. But insurers cannot afford to withdraw into a shell while consumer advocates pound away at their “profiteering.” They need to be prepared with the facts to show how market forces (overcapacity and improving experience) are driving premiums down for most lines, while that same “invisible hand” is having the opposite effect on property-catastrophe risks after back-to-back monster hurricane seasons.
In The Times story, J. Robert Hunter, director of insurance for the Consumer Federation of American, and a longtime industry gadfly, was quoted as stating that the situation is unfair, because insurers have “overestimated their losses and vastly overpriced. And now, when the money rolls in, there is no relief for consumers. He added that youve got to lower rates when profits are good. You cant just go up when its bad and stay there.
How should the industry respond to such an argument? Do they have a leg to stand on, especially with investment returns on the rise? What kind of political backlash should they expect if rates don't start coming down more sharply?
My bet is that the good, old “invisible hand” will take over once more. With capital still coming into the business, and Wall Street singing “We're In The Money” again, many insurers will give in to their worst instincts and start chasing the market down. We're looking at a seriously eroding soft market for 2007, perhaps even extending into the heretofore no-man's-land of property-catastrophe.
“Problem solved,” right? Maybe as far as the government, consumer advocates and buyers themselves are concerned–but only for the short term. Plummeting premiums would drastically reduce profitability, while discouraging new capital investments in the industry, thereby weakening many carriers. That's never a good thing for sellers or buyers of insurance.
What's your take on all of this?
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