Debunk Price-Gouging Insurer Legend

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

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

The New York-based Risk and Insurance Management Society reports that the cost of risk for businesses relative to revenues fell by 42 percent between 1992 and 2000. Even with the increases of the past two years, businesses are still paying an estimated 13 percent less to manage risk than they were a decade ago. The actual decline is greater still because terms of coverage were substantially broadened during the 1990s.

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

Shallow-thinking critics of the p-c insurance industry are also fond of citing the crashing stock market as the principal reason insurers are raising rates today, though few have noticed that stocks accounted for just 17 percent of the industrys invested assets in 2001.

Nevertheless, it is true that the price of insurance is directly related to return on investment. In fact, by law, insurers must factor investment return into their rate calculations when seeking rate changes in many key lines of insurance.

No one (including consumer advocates) seemed to mind during the 1990s when expectations of high rates of return on investments pushed the cost of insurance downward, but it must be recognized that this is a two-way street. If investment returns diminish, then any change in underlying costs must be offset by price increases and tighter underwriting.

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

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

While the legend of the price-gouging insurer will no doubt live on, 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 the fictions that our critics thrive on.

Robert Hartwig, Ph.D., is senior vice president and chief economist at the Insurance Information Institute in New York. He can 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 serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.