If the survey conducted to executives from different insurance companies is true, then the auto insurance industry is in for a big crunch.
In a poll conducted at the yearly Property and Casualty Insurance Joint Forum Industry, a total of 51% industry execs said that overall industry profits would remain flat. This is because of expectations that a number of premiums would likely fall. Pessimism on its growth is accentuated by the fact that only 14% polled that any increase in the volume of premiums is likely to happen.
When it comes to profit, 51% anticipate increase in revenues in the motorist insurance industry. Only 79%, however, believe insurer combined ratios would rise for the over-all industry.
Combined ratio is a measure of profitability utilized by insurance companies to find out how well (or bad) it is performing in its daily operations. A ratio above 100% would mean that it is spending more money in claims than what it is actually earning. Meanwhile, a ratio below 100% means that an insurer is making underwrites profits.
Many participants ascribe this bleak prediction from the economic hardships that the country is facing. Steven Weisberg, chief economist and senior vice president of the Insurance Information Institute, said that while there are hopes that this economic environment would improve, there would still be severe problems relating to what he referred to as the great recession.
He took as an example the long-term unemployment that employees usually undergo. He stated that as of November 2009, about 6.1 million Americans were unemployed for a period of 27 weeks or so. This is a notable increase from 4.8 million when the recession began.
He also said that a research revealed that when an unemployed person finally lands a job, 40% would accept lower pay from previous employment. This affects the buying power of consumers as a whole.
Weisberg likewise took note of the fact that very little relief can be had from investments made by insurers. He continued that unlike before, underwriting losses could be overcome on investments made by insurance companies mainly in long-term and intermediate-term bonds. However, with interest rates likely to stay low, like last year, there would not be a large source of funds enough to cope with or exceed a firm’s cost of equity capital.
Seventy one percent of participants of the forum also polled that inflation would likely rise. This would eventually increase loss costs. Inflation, as a progressive increase in prices, equate to less value for money at hand by insurers.
The forum was created to provide industry leaders with the opportunity to discuss topics of general interest. Held in New York, around 250 participants from the insurance industry attended.