Insurance Costs Set to Come Down After High Ride

The slowing economy is beginning to take a toll on insurers—and that's good news for private and commercial customers.

By Matthew Mogul, Associate Editor, The Kiplinger Letter

December 6, 2006

Expect premiums to fall or be flat next year, as competition heats up in the insurance industry. The last couple of years have been remarkably good for insurers, even with the losses from hurricanes Katrina and Rita, and more good times are ahead. But they won't be quite as profitable as they have been.

Property and casualty insurers will see record profits for the second straight year in 2006, with big gains both from underwriting and from the returns on their investments in financial markets. Their bottom lines are also benefiting from a big drop in claims this year—the result of a surprisingly mild hurricane season, a lack of terrorism on U.S. soil, longer life spans that postpone payouts and fewer traffic injuries because cars are safer.

Next year, however, the slowing economy will take a toll, as will new rules by credit-rating agencies that will force insurers to beef up their reserves. Plus competition will increase in most areas.

That's why premiums will stop rising. Property rates will fall everywhere but along the coasts where the risk of storms is greatest. Owners near the water, from Texas to Maine, will see premiums go up 10% or more in 2007.

Life insurance costs will drop about 4% next year, continuing a steady retreat that has been going on for years Auto rates, which rose only 0.5% this year, much less than the rate of inflation, won't go up at all next year. Employers can expect to pay less for workers' comp, on average, though rates will vary from state to state because of local laws and regulations. Terrorism rates will climb, however. Congress will renew the law providing a backstop, but it will make insurers take on more of the risk, which will mean higher premiums for business customers.

Soaring insurance profits are prompting a wave of initial public offerings among reinsurers, companies that insure insurers. A bunch of reinsurers were created in the wake of Hurricane Katrina to take advantage of higher prices and to replace a few carriers that went out of business. They did very well and are now looking to cash in.

An uptick in mergers is also on tap. Some private equity firms that financed start-ups to take advantage of high post-Katrina rates want to grow through mergers. Insurance brokerages are also good takeover targets.

Products for baby boomers will keep the black ink flowing and make up for some of the slowdown due to the overall economy. Among these: Policies combining long term care with payouts of life insurance, variable annuities guaranteeing the owner's principal and fixed annuities for people who are retiring without pensions.

But the good times are drawing scrutiny from regulators and Congress looking into why insurers haven't settled more than a thousand hurricane-related lawsuits in Louisiana and Mississippi. Congressional hearings won't lead to much, however. Insurers have a powerful ally in Democratic Sen. Chris Dodd, the incoming head of the Senate Banking Committee, who represents insurance-rich Connecticut.

Regulators will be tougher. Insurers will face stiffer rules requiring clear disclosure of fees and other hidden costs.

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