Debunk Price-Gouging Insurer Legend

Critics of the p-c insurance industry have created the legend ofthe price-gouging insurer by substituting anecdotes for averages.Truth be told: insurance, by almost any measure, has becomemore affordable than it was a decade ago. The numbersspeak for themselves:

Net written premiums as a percentage of gross domestic product fellfrom 3.8 percent in 1990 to 3.0 percent in 2000--a 21 percentdecline, before rising slightly to 3.2 percent of GDP last year(see Chart 1).

The New York-based Risk and Insurance Management Society reportsthat the cost of risk for businesses relative to revenues fell by42 percent between 1992 and 2000. Even with the increases of thepast two years, businesses are still paying an estimated 13 percentless to manage risk than they were a decade ago. The actual declineis greater still because terms of coverage were substantiallybroadened during the 1990s.

What about personal lines? Same story--insurance has become moreaffordable. The price of homeowners insurance relative to themedian cost of buying an existing home, for example, fell 13percent between 1994 and 2002 (see Chart 2). Hence, even thoughhome prices continue to skyrocket, homeowners insurance has becomea better bargain than ever.

Shallow-thinking critics of the p-c insurance industry are alsofond of citing the crashing stock market as the principal reasoninsurers are raising rates today, though few have noticed thatstocks accounted for just 17 percent of the industrys investedassets in 2001.

Nevertheless, it is true that the price of insurance is directlyrelated to return on investment. In fact, by law, insurers mustfactor investment return into their rate calculations when seekingrate changes in many key lines of insurance.

No one (including consumer advocates) seemed to mind during the1990s when expectations of high rates of return on investmentspushed the cost of insurance downward, but it must be recognizedthat this is a two-way street. If investment returns diminish, thenany change in underlying costs must be offset by price increasesand tighter underwriting.

That being said, p-c insurers still managed to realize aninvestment gain (consisting primarily of investment income,realized capital gains/losses, and stock dividends) of 8.7 percentof earned premium in 2001.

While down from the 10-year average gain of 10.1 percent, my guessis that many people would gladly trade the performance of theindustrys portfolio for the double-digit negative returns manypeople experienced last year.

While the legend of the price-gouging insurer will no doubt liveon, accusations made against the industry are easily debunked.Every insurer must do their part to make sure that customers,regulators, and the media are supplied with facts to counter thefictions that our critics thrive on.

Robert Hartwig, Ph.D., is senior vice president and chiefeconomist at the Insurance Information Institute in New York. Hecan be reached at [email protected].

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, October 14, 2002.Copyright 2002 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.