Posted by Pat O’Brien
Property and casualty insurance rates continued to rise during the third quarter for both commercial and individual policies extending the pricing climb started late last year. Travelers Insurance said their rates increased an average of 7% while Dallas-based MarketScout said the overall average increase for all lines of business was 5%. Property insurance, however, was up 7% and liability insurance up 6%.
Keefe, Bruyette & Woods, Inc. said the average combined ratios were 115%. The combined ratio indicates the underwriting profit of the insurance company. It is calculated by dividing the incurred losses and expenses by the earned premium. In the above ratio the companies are paying out 15% more than they are collecting in premium. Traditionally this shortfall was being made up by investment income. In today’s interest rate environment the insurance companies have a problem.
Due to regulatory restraints the insurance companies have to keep a large portion of their investments in high quality extremely liquid instruments such as, bonds. But they also have to earn enough to offset the effects of inflation. According to the Insurance Information Institute approximately 70% of insurance company investments are in bonds. The companies are starting to move those bonds from municipal bonds to higher yield corporate bonds. They are also looking at real estate and private equities for a smaller portion of their investments. Everyone remembers in the past how many buildings were owned by insurance companies and pension funds.
Moody’s Investors recently said, “Improved premium rate levels should help support profitability in the US commercial property/casualty insurance sector for the next 12 to 18 months bolstered by further reserve releases”. Insurance companies build reserves for their claims and at times those reserves can be reduced based on actual claim activity. This reversal goes back into the company’s profit.
What does all this mean for the small business owner? The smaller the policies the higher the rate increases. More than likely you will continue to see your property and liability premiums going up every year in the near future 5 to 7%. To maintain their profitability the insurance companies can only do so much reducing expenses, tightening underwriting and increasing investment income. The only remaining factor in the formula is the premium rate.