The Party's Over
That's the conclusion of an insurance-stock analyst at Prudential Financial, Inc., after predicting that Property insurance rates will drop by 9% in 2004, and Liability premiums will be flat. The Wall Street Journal reported this month about two separate surveys of insurance pricing in the second quarter of 2004, the trend seems to show more insureds are experiencing rate reductions rather than increases, although the dollar amounts of the increases were greater, resulting in average rates that were flat or up marginally.
This is akin to saying that decliners outnumbered advancers in the stock market and is the first really positive sign (from a policyholder's standpoint) since rates started skyrocketing after September 11, 2001.
In one of the surveys, conducted for the Risk & Insurance Management Society, renewal pricing was broken down into five lines of coverage, domestic Property, General Liability, Excess Umbrella Liability, Workers' Compensation and Directors & Officers Liability (D&O). Fully 50% of Property, General Liability and D&O purchasers saw premium decreases, while less than 40% saw increases. This is good news for D&O buyers in particular because premium increases in that line of coverage were some of the largest over the past three years as a result of recent corporate scandals.
The largest percentage of increases was in Workers' Compensation, where pricing is less affected by market forces. Fifty percent of Workers' Compensation buyers experienced premium increases and only 43% reported decreases.
So, you ask, why say the party is over? Hasn't it just begun? It all depends on your point of view. If you are an insurance company, an insurance company executive or an insurance company shareholder, you could be looking at slower growth and lackluster performance in 2005. On the other hand, for insurance buyers, this may signal a period of greater control over costs.
It is generally thought that the terrorist attacks may have triggered the current hard market, but the increased pricing was more the result of cutthroat premium reductions during the previous decade and was only precipitated by those attacks. There are a couple of reasons why we probably should not expect a return to the aggressive price competition of the 1990s, however, and that is a good thing. One reason is that interest rates are not likely to rise to those levels again, and that is what fueled the rush to get premium dollars in the door to be invested. In addition, there are not as many insurers around as there were ten years ago. Companies have folded, companies have merged and companies have left the U.S. market, leaving us with much less competition than there used to be.
Nevertheless, we should all be looking for stable pricing in the near term and eventually some reductions. Rather than say the party's over, we'd say, "Party on, dude!"
-- Christopher B. Ashton, CEBS
Vol. XVII, No. 3
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We saw an interesting, and disturbing, article recently in the New York Times regarding an insurance sales practice involving members of the armed forces. It seems that some "financial planners" have been taking advantage of captive audiences of new recruits and basic trainees to sell them expensive life insurance and inappropriate mutual funds. These compulsory classroom sessions on personal finance are often conducted by insurance salespeople who sign up the trainees, mostly young and inexperienced, without telling them what they are buying, or that they are buying anything at all. They have the recruits sign and initial the paperwork, including allotment forms authorizing payroll deductions, without giving them time to read them or providing them with copies. What they are purchasing is often small amounts of life insurance (in the $25,000 to $45,000 range) for premiums of $100 a month that are taken out of their paychecks. In contrast, a program sponsored by the military allows members to buy up to $250,000 in life insurance for only $16.25 per month. Despite Pentagon efforts to stop these practices, they have apparently been around since the Vietnam War, but with the increasing number of casualties in Iraq, a "selling opportunity" has arisen. Is it any wonder that life insurance agents are held in such low esteem? --- Ed.
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