Now that we're well into 2013, hopes abound for an improved economy. To the insurance industry, this translates to rate hardening to combat the twin petards of historically low interest rates and low premiums, upon which insurers have been impaled over the last six years.
The workers' compensation industry was particularly impacted in a pejorative manner as a result of the enervated economy that was brought on by the collapse of real estate prices. After all, the major visible aspect of the economic downturn was a massive loss of jobs throughout the strata of society. Less employees ultimately means lower workers' comp premiums. Competition for market share kept premiums low, while minuscule interest rates militated against insurance companies making money on investment income (traditionally a major source of industry profits).
All insurance companies (whether stock or mutual organizations) exist to make a profit and self-perpetuate. The best way to insure profits is strict underwriting and pricing discipline, married to a conservative approach relative to the investment portfolio. Insurance companies who have fallen into the "grow market share at all costs" philosophy inevitably fall by the wayside. Lowering prices for statutory coverage will indeed increase market share for a time, before the roof caves in when loss development catches up and exceeds revenue. At that point it's too late to raise prices, which would basically drive away all of the price sensitive business that was added to the book by offering rock-bottom premiums. Indeed, the insurance landscape is littered with the detritus over the last three decades of heretofore healthy companies that decided to practice "cash-flow underwriting" schemes.
So 2013 affords all market participants with a new year rife with renewed hope. A key component of economic recovery is consumer confidence. If the body public thinks that the economy is recovering, they will begin to spend more money on everything from new vehicles to new houses. This will translate to more jobs in various industries, which will eventually equate to a larger workers' comp premium pool. Recall the halcyon economic days of 2003-2005 when unemployment was low, consumer spending was at an all time high, and borrowing money was an exercise that allowed anyone to speculate in real estate investment. Of course the fact that lenders had relaxed their standards for approving loans, and this "free money" eventually led to the bubble bursting in 2006. But up until that time, everyone was on a wild ride, including the insurance industry.
Currently, the economy remains fragile as governmental debt escalates at dizzying speed, and both political parties refuse to reduce spending to align with actual federal income. That is no positive trend. There is a glut of homes on the market at reduced prices, and energy costs remain high. So what about consumer confidence? Well, it isn't salubrious. In fact the latest Consumer Confidence Survey by The Conference Board revealed the following:
of current conditions deteriorated in January. Those claiming business conditions are
"good" declined to 16.7 percent from 17.2 percent, while those stating business conditions are
"bad" increased to 27.4 percent from 26.3 percent. Consumers' assessment of the labor market has also grown more negative. Those saying jobs are
"plentiful" declined to 8.6 percent from 10.8 percent, while those claiming jobs are
"hard to get" increased to 37.7 percent from 36.1 percent.
"Consumers' outlook for the labor market was more pessimistic. Those anticipating more jobs in the months ahead declined to 14.3 percent from 17.9 percent, while those expecting fewer jobs remained virtually unchanged at 27.0 percent. The proportion of consumers expecting their incomes to decline rose to 22.9 percent from 19.1 percent, while those anticipating an increase declined to 13.6 percent from 15.6 percent."
That January report was rather depressing. If John Q. Public has little confidence in the general health of the domestic economy, there is little reason to believe spending patterns will substantially change. Of course, borrowing money is no longer as facile as it was several years ago as financial institutions rushed to shore up their lending criteria after the real estate meltdown, and this also has a downstream chilling effect on the economy.
So what is the tipping point for insurance companies to believe that the time has arrived to expect the acceptance of increased premiums? It seems to be a strategy of slowly introducing price increases upon renewal and with new business quotes. However, in this economy, the insurance buyers are more sensitive than ever to competitive pricing, so it's obvious that no company is simply going to congenially accept price increases from their carriers with a smile and handshake.
The insurance industry, in its quest for rate hardening, will have to go "low and slow." Although the public may have become immune to the price of gas fluctuating 50 cents per week, it certainly isn't prepared for premium increases of 25 percent upon renewal. That type of escalation is guaranteed to send a risk scurrying for a lower quote, as well as perhaps seeking out alternative risk financing arrangements.
Of course, all bets are off if the economy exhibits continued signs of deterioration. The market will not be able to sustain significant premium escalation in that type of environment. So the best prescription is more than likely incremental increases consistent with what the market will tolerate.
Although every New Year starts off with eternal hope that what will come will be better than what has gone before, 2013 may ultimately be a disappointment in terms of industry price hardening to offset the extremely low interest rates from the Fed, which appear to be going nowhere fast.
February 20, 2013
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