We have watched over the past several months with great anticipation as the stock market has shifted from record highs to alarming lows. We've seen our financial system take blow after blow with institutions such as Bear Stearns, Leman Brothers and Wachovia filing for bankruptcy. Even AIG recently made headlines with a 85 billion dollar bridge loan, given to keep the nation's second largest insurer afloat. Anyone with a television or a newspaper understands how the mortgage crisis, the slumping real estate market, the price of oil, and the upcoming election, have the United States on a slippery slope, but how did the insurance world get involved?
Over the past several years, we have been in what is called a "soft" insurance market. This means that prices are lower and risk appetites are big. Insurance companies have been gobbling up premium and investing it into the stock market. After all, that is how insurance companies make their money. The recent soft market has been good for the insured because premiums are down considerably. Insurance companies seem to have been enjoying it as well because returns on investments have been favorable.
What the insurance industry is coming to realize is that some insurers collected inadequate premiums in comparison to the claims being paid out, and over the past year, haven't had the stock market to fall back on.
The AIG story is far from over and you will watch as their assets are sold off to pay back a big loan with an even bigger interest rate (12%). What is yet to be seen is how the rest of the insurance world will be effected by the 'credit crunch" and a soft market that might be coming to a close.
You can expect to see additional acquisitions like that of Safeco by Liberty Mutual for $32 billion dollars. You can expect to see a consolidating insurance market, and the companies with the deepest pockets and the most in reserves, will be bailing out those companies who were less prudent with their underwriting. We know this to be true with the "six year average combined loss ratio" at 102.4, according to the National Underwriter publication. This means that insurance companies are losing $.024 cents per $1 of premium collected. With this, you can expect that premiums will gradually start to increase. This might start with flat renewals, evolving into potentially hefty increases over the next several years. Insurance companies cannot survive long term with loss ratios over 1.00 and the only way to get back on course is to cut overhead or increase revenue, or both.
No one likes to hear that premiums are going to go up, but as you are aware, premiums have for some reduced by up to 50% over the past several years, so that possibility shouldn't come as much of a surprise to anyone. Anything that seems too good to be true, usually is.
The changing commercial market isn't all gloom and doom. You will still be able to find affordable insurance because our economic system still fosters a competitive market place. When one company prices themselves out of contention, another insurance company likely will pounce on the opportunity.
Well calculated decisions are the best way to navigate through uncertain times, so please do not hesitate to let us know how we can help!
