Here’s the Good News About Your Insurance

Given all the bad news swirling around the insurance business these days, you’d think the industry was in a crisis.

Last week the giant American International Group Inc. confessed that it had used at least $1.7 billion in improper accounting moves in recent years to spruce up its numbers for Wall Street. AIG’s longtime chairman, Maurice “Hank� Greenberg, resigned under pressure as probes by the Securities and Exchange Commission and state regulators continued.

Before AIG, the spotlight was on the insurance brokers, who organize coverage for companies’ office buildings and factories and employees’ health. In the last six months, investigations by state attorneys general have led to brokers pleading guilty to enriching themselves at their clients’ expense.

What’s gone largely unnoticed is that the insurance business has been highly profitable since it recovered from the blow of the Sept. 11, 2001, terrorist attacks. Insurers like to keep a low profile, or course, and they have been quietly raising premiums and raking in the dough.

In fact, last year, despite four devastating hurricanes in Florida and neighboring states, the insurance industry realized one of its best profit levels in a quarter century.

Some crisis.

But amid all this comes the best news of all: Competition for your business is heating up, and as a result insurance rates are coming down.

That’s a big deal because insurance is, after all, part of every business and farm, home and hearth in the land. An industry with more than $1 trillion in assets, the insurance business receives on average $775 a year in premiums from every car owner in America, $600 a year from every homeowner.

Automobile rates will decline “by 5% to 7% on average� this year, said analyst Cliff Gallant of investment banking firm Keefe Bruyette & Woods. And rates will be coming down 10% to 15% for commercial insurance, he said. (An exception is health insurance, a category in which rates continue to rise inexorably.)

Auto insurance rates are coming down because there are fewer accidents, perhaps because of better law enforcement, says Peter Lewis, chairman of Progressive Corp., the nation’s third-largest auto insurance firm. Also, cars are safer because of better tires, gear and guidance systems. And there is less driving, maybe because of high gasoline prices.

“The industry itself has been surprised� at the good news, Lewis adds.

For the rest of the $300-billion property and casualty insurance industry, the falling premiums stem largely from rising interest rates.

Insurers are slashing rates to drum up more business and draw more premiums into their coffers. Then they can invest that money, known in the industry as the “float,� in bonds and other fixed-income securities to take advantage of higher returns.

The essence of the insurance business is the float, as Warren Buffett explains in the latest annual report of his holding company Berkshire Hathaway Inc. Float arises for Berkshire’s National Indemnity Insurance Co. and its car insurer GEICO, Buffett wrote, because “premiums are paid up front, though the service we provide -- insurance protection -- is delivered over a period that usually covers a year.�

Sometimes, in fact, claims can take years to be reported, as with asbestos damages in recent decades. In the interval, insurance companies invest the money they’ve been given by customers and pocket the returns. (One of Berkshire’s insurance companies was involved in a deal with AIG, and Buffett must answer investigators’ questions next week.)

So insurance firms make money on investments and on premiums -- as long as there aren’t too many claims for, say, accidents or damage to homes or businesses.

But if claims mount more than anticipated, as has occurred with asbestos damages, and companies have not taken in sufficient premiums to cover those claims, losses grow. Indeed, A.M. Best Co., the leading insurance rating and information service, reckons that insurers already have underreserved by $59 billion against future claims for asbestos and other environmental damages such as household mold.

Add the fact that insurers’ costs will be rising as regulators force insurers and brokers to be more transparent, prohibiting hidden commissions and special deals. Brokers especially will have “more audits and auditors and lawsuits and lawyers,� says Karen Horvath, a senior vice president of A.M. Best.

But even with the prospect of greater risks and higher costs, industry insiders don’t expect to see a return to rising premiums anytime soon.

Janet Jones, head of Elkins/Jones Insurance Agency Inc. of Los Angeles, says the regulatory environment will encourage commercial customers “to shop around more for their insurance,� helping to keep rates from climbing.

In the long run, says Progressive’s Lewis, “more transparency, clearer disclosure for consumers and the markets will be good for the industry.� And for its customers who, after all, are us.

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James Flanigan can be reached at [email protected]