ECONOMIC FACTORS FUELING P/C RATES

Economic factors such as rapidly increasing claims costs, not some alleged conspiracy aimed at taking advantage of the American public, is driving increases in insurance premiums, according to the Alliance of American Insurers (AAI). “As the insurance industry recovers from its disastrous 2001 results, consumerists and some regulators have expressed concern that the industry is taking advantage of the situation to increase rates and recover lost profits. However, a careful examination of the financial results of the last few years shows a tremendous pressure on rates from claims costs rising faster than premiums,” according to Lenore Marema, vice president of legal and regulatory affairs for the AAI. “The Alliance urges state insurance regulators to ignore consumerists’ cries of ‘wolf’ and refrain from rushing to regulate a problem that the market can best deal with. Time and again we have seen cases where over-regulation has hindered markets’ recoveries. Given the weakened state of the economy, it is vital that we don’t make that mistake again,” she said. Marema noted that comparing premium growth with the growth in losses for the property/casualty insurance industry during the 1990s reveals an interesting picture. In 1990, insurers’ profitability was at a very low level of five percent of premium and less than an eight percent return on equity. By contrast, members of the Fortune Service 500 exceeded an 11 percent ROE. Through most of the early 1990s, profitability improved because premiums increased faster than claim costs. Premiums increased at an average annual rate of 3.3 percent, while claims increased by only 1.3 percent a year. By 1997 industry net income stood at 13.6 percent of premium, equaling an 11.9 percent ROE. However, this return still trailed the Fortune 500 median ROE of 13.9 percent. Also during this time, income from investments held to a fairly tight range of 14 percent to 15 percent of premium. As a result, during this period of very small increases in claims and steady investment returns, insurers were able to earn a reasonable rate of return, albeit below the median of other industries. However, after 1997 the insurance world began to change. From 1997 to 2000 premiums increased at an even smaller growth rate than in the previous eight years, while claims took off increasing an average of 7.1 percent annually. 2001 saw an even more pronounced increase, jumping more than 17 percent. Over the four-year 1997-00 period claims increased 43.8 percent while premiums increased only 15 percent. If one ignores last year, which included Sept. 11 losses, losses still outgrew premiums by a considerable amount—22.7 percent for claims to only 8.3 percent for premiums. “With losses outstripping premiums by such a large amount, great pressure was being exerted to increase premiums, which is evident in the 8 percent increase experienced in 2001,” Marema said. “One has to keep in mind that the 2001 premium increase was entirely independent of the events of Sept. 11. By the time of that tragedy, insurers already were establishing rates for Dec. 2001 and Jan. 2002 renewals.” In addition, she notes that although premium increases in personal lines were larger than those in commercial lines, they “still failed to keep up with increases in claims costs.” From 1997 to 2000 premium increases averaged 3.7 percent, but claims increased 4.5 percent. In 2001 personal lines claims jumped 14.3 percent and premiums increased 8.6 percent.