Economy and its Effect on Insurance Premiums

Tony Grahn
Written on June 8, 2010

The economic turmoil of recent times has been concerning. Many people are wondering, “what effect will this have on my insurance?” This year we’ve seen the government spend $85 billion on rescuing AIG. In addition, a cluster of hurricanes has wreaked damage on the seaboard. Does this mean premiums are going to rise?

According to Jessica Dickler of cnnmoney.com,.

“… experts are quick to point out that the financial woes facing AIG shouldn’t have any impact on the company’s policyholders. In addition, while the hurricanes may lead some insurers to raise their premiums, or the fee you pay for insurance coverage, most industry watchers thing the increases will be modest.

The Last Rise

Insurance companies rely upon savvy investments to make profit and ensure financial viability. Even though claims are important, they aren’t always necessary. Even a high-claim year may be offset by good performance in investments.

From 1999 to 2000, the Dow Jones average fell significantly. During this time, insurance companies felt the effects of reduced investment returns. By the fall of 2001, insurance companies knew premiums need to be increased. Even though without increases, the companies were in trouble, no company wants to be the first to raise the cost. Immediately after the 9/11 attacks, it became obvious to the insurance industry than increases were coming. Nearly every company raised there rates in the following months.

Will it Rise Again?

The tide of the markets has now turned. We are in the middle of a “soft market” were premiums are at or near a low. Many insurance companies are beginning to rumble and speculate about raising premiums. With government bailouts and natural disasters, increased premiums are almost certain. How much and for how long is up for debate.

Insurance companies usually have enough surplus to weather the storms. Yet the number and frequency of the storms in the recent years has been brutal. Unfortunately, higher premiums are almost certain.