Insurers blame rising home & car premiums on the weather

The cost of insuring your houses and your cars is going up. This shouldn’t be much of a surprise, considering the billions of investment losses insurance companies have taken since the market cratered last year. After all, insurers’ profitability depends on the returns they expect from investing your premium dollars.

Except, in the case of property insurers, investment losses aren’t really the problem. Nope, it’s the weather.

Last year, property/casualty insurers actually made money on investments. Sure, only about half as much -- $31.4 billion -- as the prior year, but still, not bad. It was the underwriting side where they got hammered. Insurers paid out $21.2 billion in claims more than the premiums they collected. That’s a huge swing from a $19.3 billion gain in 2007.

The trend continued in the first three months of 2009. The property/casualty business had $3.7 billion in investment gains (down from $12.4 billion the year before.) But insurers paid out $2.5 billion in claims for all the cars, homes and buildings damaged by fires and storms -- four times more than they had in the first quarter of 2008 -- according to ISO and the Property Casualty Insurers Association of America.

“Hail, tornadoes -- we haven’t escaped a disaster in the last 18 months,” says Jeff Dailey, president of Farmers Insurance’s personal property and casualty business. “We’re having to take premiums up substantially.”

The silver lining, such as it is, is that you don’t have to worry about your property insurer going out of business. Even with losses -- overall, after taxes, the industry lost about $1.3 billion in the first quarter -- P/C insurers have $437 billion available to pay claims. That’s mostly because P/C invested more conservatively, and more short-term, than life insurers, many of whom got too aggressive with stocks and things like Fannie Mae and Freddie Mac bonds. It’s also because of 2006 and 2007, when insurers pocketed gangbuster profits. “Insurers went into the financial crisis better capitalized than they’d ever been,” said Robert Hartwig, president of the Insurance Information Institute trade group.

It would be nice if insurers used some of those record profits to give us policyholders a break from rising premiums, especially because consumer groups like the Consumer Federation of America say companies earned those profits in part by overcharging us, cutting coverage and underpaying claims.

But P/C insurers say continuing reports of climate change and wacky weather make them nervous about sustaining further claims losses from the catastrophes to come. On top of that, while the market turmoil didn’t decimate their balance sheets, it did make insurers more cautious about the amount of money they can expect to earn from investments. “Insurers only have two sources of revenue, investments and premiums,” Hartwig says. “To the extent we can offset only a smaller share of losses with investment returns, … rates are going to have to pick up the slack.”

In fact, he says, since 1978 P/C insurers have made money on underwriting (premiums minus claims and expenses) in only three years -- 2004, 2006 and 2007. Going forward, he says, the industry may be returning to the post-Depression era of 1940-1959, when insurers made profits on underwriting in all but two of those years -- because the Depression taught them they couldn’t rely on the markets to make up the difference.

There doesn’t seem to be much consumers can do about this. We have to insure our homes and our cars. Yes, we can shop around (although, as someone who lives in a hurricane-plagued coastal state, the idea of “shopping” for home insurance is a joke -- I’m lucky if I can get a policy from a private company at all). Yes, we can increase our deductibles to keep costs low. Dailey suggests choosing an insurer with operations spread around the country, to mitigate the financial damage one giant storm can do to its profit-and-loss statement. But seems like this is just one more price increase that we insurance customers have to suck up.