http://www.sun-sentinel.com/business/local/sfl-sbinsureinvest20oct20.story
Rates soar as stocks sour, but other factors are at work
By Purva Patel
Business Writer
October 20, 2002
Charles Svitak is steamed about soaring insurance premiums. He bought less liability coverage for his auto repair shop in Boca Raton because he couldn't afford the 60 percent increase insurers quoted him for full coverage when his policy came up for renewal last summer.
He concedes that insurers have been hit with catastrophic events that led to more losses. But he thinks insurers who lost money in the recent bear markets are passing the costs of their mistakes to consumers.
"The bottom line is they have the ability to turn around and jack your rates up," he said.
As markets plunge and rates rise, many policyholders are wondering if there's a link. After all, the rapid rise in investment gains during the 1990s helped insurance companies offset cost trends such as underpricing.
But industry experts point to rising claims losses and climbing litigation expenses as more significant factors behind the soaring rates.
"It's not inconsequential, but [the market] is not the primary driver," said Robert Hartwig, chief economist with the Insurance Information Institute in New York.
Aside from poor investment returns, he points to a rise in claims losses and the Sept. 11 attacks. A growth in mold claims and expenses related to insurance fraud have each contributed to a tighter property and auto insurance market in Florida.
An example of the relative impact of investment yields can be seen in the property and casualty insurance business. These personal line insurers collected $323.5 billion in net premiums last year according to the Insurance Services Office, which tracks the industry's returns.
Investment income for property and casualty insurers dropped $3.6 billion in 2001 from the previous year, as the sector suffered its first net loss. But expenses and claims losses ballooned $61.8 billion to $407.4 billion in 2001 -- an increase almost 17 times the loss from investments.
Even regulators give investment gains or losses -- as reflected in overall earnings -- little consideration.
For example, the Florida Department of Insurance factors in overall profits and losses when approving rates, but that number only accounts for about 1 percent of its decision, said Beth Vecchioli, a deputy director at the department of insurance. Regulators look mostly at loss ratios, or how much more a company pays out for claims than it collects in premiums.
She said that when premium income is low compared to losses, and investment income isn't helping offset those losses, a company might need to raise rates.
"But then it's kind of like the tail wagging the dog," Vecchioli said, referring to how a small factor like investments can spur larger shifts in strategy.
Investment mix
For their part, regulators don't micromanage what securities a company holds, just their diversification.
For instance, Florida law requires that no more than 15 percent of a company's total assets be invested in stocks, and no more than 3 percent can be invested in any one stock. Investment in riskier, medium- to low-grade bonds is capped at 13 percent.
Insurance companies are generally allowed to invest monies left over after they set aside reserves for claims that have occurred and that they expect to occur. They must ensure, however, that a certain amount is set aside as "surplus," or a cushion to protect policyholders in case of unexpectedly high claims.
Despite the small role played by investment returns in setting rates, no one disputes that dismal markets have contributed to the higher premiums consumers are seeing.
"Now a lot of the heavy lifting is going to be done on the underwriting side," Hartwig said. That means stricter policy terms and conditions as well as higher prices, he said.
Markets have plunged to multiyear lows, and rates in various lines of coverage have climbed 30 to 300 percent.
Historically, about 25 percent of the industry's portfolio has been invested in stocks and overall returns average 4 to 5 percent, Hartwig said, adding that portfolios have seen a reweighting in light of the market swoon as companies shift toward bonds.
"Companies are going to be much less dependent on stocks and have a lot of cash on hand," said Don Griffin, vice president of the National Association of Independent Insurers in Chicago.
For Plantation-based 21st Century Holding, the plunging markets now mean investing only in bonds rated AAA, the highest-quality. The company, which had $35.5 million in sales last year, underwrites auto and homeowners insurance through its subsidiaries Federated National Insurance Co. and American Vehicle Insurance Co.
The insurer pulled out of the stock market completely last year after losing millions on investments in the technology industry.
"The board of directors made a decision that it doesn't make sense for us to trade stocks, so we quit doing that," said Richard Widdicombe, who serves on the company's board and as president of the two subsidiaries.
Bond investments didn't fare much better. The subsidiaries had $2.5 million of WorldCom bonds in their portfolios and forced a one-time writedown of the entire holding.
The company was able to offset some of the losses from investments in WorldCom, but now looks more to real estate and short-term bonds.
"The markets affected us," Widdicombe said. "We're not very proud of it, but portfolios of all companies have taken a hit."
Across the industry, insurers are adopting other conservative investment approaches, including buying less stock in their affiliates, or companies in which they have financial interests.
While stock losses aren't driving all of the double-digit premium rate hikes consumers like Svitak are facing, they have given insurers pause -- and made them re-examine all parts of their business, including their investment strategies.
"[Insurers had] too many eggs in one basket," said Stephanie Eakins, an insurance analyst with Weiss Ratings Inc. in Palm Beach Gardens.
Purva Patel can be reached at ppatel@sun-sentinel.com or 954-356-4667.
Copyright © 2002, South Florida Sun-Sentinel
