Insurance Industry Results Deteriorate in 2017! What This Means to You

Insurance companies make money in one of two ways, underwriting and investments.  The profitability of the industry generally determines the cost of insurance.  When the industry is making decent money and surplus is rising, pricing trends downward.  When the industry, however, is not hitting their numbers, surplus tends to decline and pricing tends to increase.  While rates have been either stable or decreasing for the past 5 years, that could change based on the industry’s recent results.

When losses and expenses are less than premiums, there is an underwriting profit.  When losses and expenses exceed premiums, there is a loss.  This is what happened in 2017 (and 2016).  The expected net underwriting loss for 2017, according to AM Best Company, will be $29.3 billion!  In 2016, there was an underwriting loss of $6.5 billion.  Investment income pushed the industry into the black, however, pre-tax operating income declined substantially from $41.1 billion in 2016 to $14.8 billion in 2017.  Needless to say, the pre-tax return on revenue fell sharply as well, from 7.8% in 2016 to 2.7% in 2017.  The industry strives for a 10% return or greater.

The main driver for the poor performance is the increase in catastrophic property losses and deteriorating results in the auto Line.  Floods, hurricanes, earthquakes and wildfires will collectively cost the industry about $100 billion.  The industry’s total surplus is about $725 billion.  Auto insurance is also losing money.  This is mainly driven (pun intended) by distracted driving and the increased cost to repair a camera- and sensor-laden vehicle.  It is not uncommon to see our auto underwriters seek rate increases of 15-25% or more on renewals.

Some insurance prognosticators predicted that these losses might turn the market and drive up premiums.  While those properties exposed to wind-driven losses, flood or wildfires might see fairly significant increases, the market as a whole is actually in pretty good shape (although auto rates will also go up).  Despite the poor operating results, the fact that the industry could absorb the substantial losses experienced in 2017 without materially increased pricing reflects positively on the insurance marketplace.

While it is important to have a basic understanding of insurance industry economics, it is more important to proactively manage your risk.  After all, the only way you can lower your insurance and risk management costs in the long run, is to reduce the frequency and severity of the claims that drive those costs.