When the Insurance Industry Has an Underwriting Loss What Does that Mean for You?

An article in today’s Insurance Journal is headlined – “A.M. Best Sees $12 Billion P/C Insurance Underwriting Loss for 2018.” This article has a great headline for insurance companies but the content paints a much better picture for consumers. Case in point, the article says that A.M. Best expects the P/C industry to generate pre-tax operating income of $43 billion in 2018 which is more than double what was generated in 2017.

The reason I call attention to this article is because if you are an insurance buyer I don’t want you to be fooled into believing the insurance companies need to increase rates because they suffered an underwriting loss in 2018. What is an underwriting loss? It is having claim and expense costs that are higher than the premium the insurance company collected. This does not mean the insurance company lost money. Insurance companies make money on investing the premiums they collect and paying claims at a later date. Some of the claims that they are incurring in 2018 won’t be paid out until years in the future, all the while that money is sitting in a bond or equity investment earning income for the insurance company.

That being said, insurance companies would like to have an underwriting profit, but it is becoming more and more difficult to achieve. Why? Insurance companies and brokers alike are suffering from what seems like a never-ending soft market where insurance prices are at best staying flat or more likely drifting lower year over year. This is good for the buyer but not so much for the seller. When the insurance company provides initial pricing on your insurance renewal that is higher they will most likely point to the underwriting loss that they realized in 2018 as to why they need more premium. Your broker may go along with the insurance company but you should fight back and this is why:

  • Pre-tax operating income for insurance companies was up by more than 100% in 2018.
  • Insurance company surplus (amount of cushion the industry has to pay losses) is still near all-time highs.
  • Loss costs are expected to be relatively flat given the low likelihood of a significant increase in interest rates and/or inflation.
  • Combined ratios (losses + expenses compared to premiums collected, if losses plus expenses equal $102 and your premium is $100 the combined ratio is 102) are near historic averages. This is essentially underwriting profit. Anything over 100 is an underwriting loss.
  • Catastrophe losses (think hurricanes, earthquakes, forest fires, etc.) are expected to be more in-line with historic averages. I would be cautious here since we can’t predict the weather 5 days out yet alone for the next 365 days. That being said, if these type losses are higher we can point to the second bullet point about insurance companies having near record amounts of surplus capital.

As an insurance buyer you can point to a lot reasons why your insurance rate should not be increasing just because the industry experienced an underwriting loss. If your current carrier does not want to negotiate a fair renewal it is highly likely another carrier is waiting and willing to do business with you.

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