Real World Economic Knock-Out Punches Guaranteed to Drive Up Insurance Prices

Knock-Out Punch #1:    Insurance Companies Are Losing Money … And That Must Change

Insurance companies have never been all that profitable, their profitability depends on the success of their investments.  Wait … before you scoff in disbelief … have you ever heard a hotshot, Wall Street analyst say, “Quick! Go invest in insurance!”  Probably not.

Here’s a secret that surprises most people: insurance companies haven’t made money on insurance for years.  Here’s why … during the long stock market boom of the 1990’s, insurance companies were selling their insurance at VERY low prices.  So low, in fact, that on average they were paying out $1.12 in claims and expenses for every $1.00 they collected in premium … actually losing money!

Knock-Out Punch #2:    The Economic Boom Is Over … And So Are Investment Profits

During the 1990’s the insurance companies did make money, of course.  But they made it by investing their cash flow in the booming economy and stock market.  Their investment profits more than made up for their operating losses, and the low prices helped them capture enough market share to keep the machine running.
But the economy boom started busting in 2000 and continued on into 2001.  The companies could no longer make enough investment profit to make up for their operating losses, and you can guess what happened.  They started raising prices.  Most likely, rates would have crept up steadily over several years (with some dramatic increases in certain lines of business) until the companies’ loss ratios were once again profitable.

But, then …

Knock-Out Punch #3:    The Law Of Supply And Demand Applies To Insurance, Too

The final upward pressure on price is simply a matter of supply and demand.  We all know how this economic law works around the holidays.  Ten million kids are screaming for the newest fad, but somehow the manufacturer only managed to ship 8 million units for the holiday season.  So, you pay $200 for something that will be $29.95 when the demand fades.

The insurance industry is suffering a similar problem now.  Its “capacity” (supply of insurance capital) is down, but the demand for insurance from businesses and individuals is just as high.  The law of supply and demand tells us prices must increase.

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