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Los Angeles Business Journal
Nov 17, 2003
by Laurence Darmiento
Rising stock markets help to stem upward trend in insurance ratesAfter several years of double-digit rate hikes for property and casualty insurance, residents and business owners finally may be in for some relief.
The rising stock market, which has an inverse impact on insurance rates over time, as well as other factors are helping stem further increases in homeowners, automobile and general business premiums.
"We think we have seen the top of the market, and might be at the beginning of a disciplined downhill slide," said David Fuhrman, a commercial insurance broker at Marsh Inc. He runs the firm's middle-market practice in Los Angeles.
While evidence is mostly anecdotal, insurers are clearly feeling relief after a three year bear market and losses from the 2001 terrorist attacks, both factors in recent rate hikes.
One of the first indications of a softening market came last month when State Farm Insurance Cos., California's market leader in homeowners insurance, partially lifted a moratorium on writing new policies that it had imposed in 2002. A few weeks later, another homeowners carrier announced a rate cut.
Meanwhile, Mercury General Corp., a leader in the automobile segment, has indicated it probably won't raise rates next year, while a recent survey indicates that rate hikes for general business insurance are finally tailing off.
Two years of hikes
Rate relief would come none too soon for both businesses and homeowners after at least two years of rate hikes that in some commercial lines topped 200 percent. Even at those rates, certain coverage was difficult to find.
The hikes generally have been blamed on a tendency for insurers over the past decade to write policies that lost money on a strict underwriting basis--meaning the premiums did not cover losses--while more than making up for it on their investment returns.
That strategy came to a halt after the dotcom bubble burst, taking the stock market down with it. At the same time, the terrorist attacks and other natural disasters dealt the worldwide insurance market another blow, while a spate of mold claims affected homeowner insurers.
Now, many of those problems have been worked through, so after years of successive rate increases insurers are finally able to make money on a pure underwriting basis. In addition, for the first time in almost three years the stock market is sustaining a rally.
"The insurance industry operates on a cycle," said Douglas Heller, an insurance specialist with the Foundation for Taxpayer & Consumer Rights. "When investment opportunities are strong, they want premium dollars to invest, and when the market is weak they want to close the doors."
Some sectors of the market are still under pressure, most notably in health insurance. It is considered unusual in the industry because it is driven by other factors, such as hospital and drug costs. It's still seeing double digit rate increases.
Another problem market: workers' compensation, though in California recent reform legislation prompted Insurance Commissioner John Garamendi to recommend a 15 percent rate cut next year. There is a debate whether the reforms will actually support his targeted cuts.
In addition, it's still a tough market for directors and officers insurance and errors and omissions coverage for professionals, as well as such specialized lines as fiduciary liability, which covers benefit administrators. The continuing scandals on Wall Street have made insurers nervous in these categories.
But for small and middle-market companies, it's another story. Take property insurance or casualty coverage against slips and falls.
"There has been a material improvement in rates," said Christopher Mandel, chief risk officer for the Risk and Insurance Management Society Inc. "Insurers got their chunk of change after 9/11 and quite frankly probably went overboard."
A nationwide survey conducted by RIMS found that in the third quarter businesses were seeing rate increases in their commercial coverage, including tough lines such as fiduciary liability, ranging from 8 percent to 25 percent. In the prior year, those increases were as much as 250 percent.
On the homeowners side, State Farm withdrew a proposed rate increase for next year, after raising rates 20 percent in the past year and a half.
Spokesman Bill Sirola said that past rate increases, as well as a new policy that limits mold coverage to $ 5,000, has put the company on a better financial footing. The company is writing new homeowners policies to replace customers who drop coverage. It has also downsized its administrative operations, reducing its claims office from 66 to 20.
"We have seen our underwriting operations become profitable," he said.
Farmers Insurance Group announced last month that it was lowering rates as much as 10 percent for homeowners willing to raise their deductibles to as high as $ 5,000. It had taken double-digit rate increases over the past two years.
The newfound strength in the homeowners market was seen following the devastating wildfires that last month destroyed 3,500 homes and resulted in well over $1 billion in damage.
Allstate Insurance Co. quickly announced a moratorium on writing new coverage during the firestorm, but despite the extensive damage quickly lifted it once the fires got under control.
Another market that has bedeviled businesses and residents alike has been the automobile insurance market, where carriers have been increasing rates in the double digits for several years.
George Joseph, Mercury's chief executive, said that his company does not expect to seek an increase in its rates in 2004, and if other cartiers seek increases they could be just a few percentage points.
"I think the companies have gotten the rate increases they needed, and the business has become more profitable than it was two or three years ago," Joseph said.
Last week, the Los Angeles-based insurer reported net income of $49.6 million in the third quarter ended Sept. 30, compared with $18.5 million for the like period a year ago. Premium volume increased to $590.2 million from $491.6 million.
Joseph warned that consumers should not expect to see big drops in auto rates, as most companies still want to make sure their premiums cover losses, though there are some companies who will try to force rates down.
"We have companies who feel like they can make money in the stock market, and we have to compete against them even though we are not heavily in the market," he said.
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