Strained investment returns translating into rate increases
While the Federal Reserve ponders when it will ease efforts to push down long-term interest rates amid a slowly recovering economy, property and casualty insurance carriers are increasingly confronting a difficult environment as a result of low interest rates on investment bonds, according to industry leaders.
The issue of low-interest bond rates affecting insurance carriers isn’t new, but by some estimates, the difficulty is reaching a new height as a host of broader, macro-economic factors take shape that will most likely push rates up for policy holders. And property-casual carriers are particularly vulnerable, given the industry’s long-held practice of investing premium dollars to generate what were once healthy profits.
According to figures from the National Association of Insurance Commissioners, released by SNL Financial, the net yield for property and casualty carriers invested assets hit an all-time low of 3.68 percent. At the same time, the amount of “junk” bonds as a percentage of investments increased by 31.3 percent to reach an all-time high of 4.07 percent.
“All property and casualty companies are seeing it,” said Kevin Walker, chief financial officer of Fireman’s Fund Insurance Company in Novato. “It’s something we all have to work through and work with.”
As a result of the economic environment, policy holders across a wide-range of insurance lines can expect a rate increase to the tune of about 5 percent, according to Bill Merget, a principal at EPIC Insurance Brokers in Petaluma. Mr. Merget also pointed to another driving factor in the pressures being applied to property-casualty carriers — a recent spate in high-claims drivers like Hurricane Sandy on the East Coast. The same occurred following the terrorist attacks of Sept. 11, 2001, prompting a hardened insurance market through 2004, when rates increased by as much as 50 percent in some instances.
Coupled with the low-interest rates, hovering at or below 2 percent on Treasury bonds, the effects are now being passed onto consumers and businesses, Mr. Merget said.
“For many of our insureds, there’s push-back because they’re not recovering quickly,” he said. For example, a high-end manufacturing client of his in the North Bay was off on yearly sales by 20 percent because of the economy. When the time came to renew the client’s insurance policy, Mr. Merget said, a 1 percent rate increase was presented from a well-known carrier, despite the client’s favorable claims history.
“The buyer was very upset, especially given a favorable claims history,” he said. “But the national trend in manufacturing is a 7 percent increase, so I needed to have a conversation with him about risk sharing.”
Insurance carriers are in a precarious spot because many, with a few notable exceptions, had little to do with creating the economic environment they’re now forced to contend with, and many invest conservatively in safer bonds. Additionally, since many of the policies for property-casual lines of insurance often take decades before claims have to be paid out, carriers can be at a disadvantage in their selections of bonds, unable to rely as much on higher yielding but riskier bonds that might be more readily used in other financial circles.
“I think for the most part you haven’t seen a lot of insurers get themselves into trouble for what they’re investing in,” Mr. Walker said. “It’s hard to find good, solid investments and it does put pressure on your business. The low interest-rate environment has been around for a while. Some people thought it would be around for a short while, but it starts to reduce the investment income. You’re frequently reinvesting.”
Mr. Walker stressed that Fireman’s Fund, which has $9 billion in assets, has embarked on a diversified, conservative investment strategy in its effort to confront the bond environment.
“Our belief is that you really have to stick with what you’ve been doing. There’s no reason to go out and chase something that will be a problem. Ninety-eight percent of our investments are in fixed-income bonds, rated as A and AA-.”
Being a division of Allianz, one of the largest insurers in the world, helps Fireman’s Fund significantly, Mr. Walker said, affording stability in a wobbly environment.
Still another factor are combined ratios for carriers — the amount of premium dollars collected versus how much is paid out on an annual basis. In 2011, the combined ratio was 106 — meaning for every one dollar collected in premiums, $1.06 was paid out to claims and expenses. In 2012, the ratio was 100, or flat.
Claims are also getting more expensive, Mr. Merget said.
Some lines of insurance are likely to bit hit harder, particularly policies that last for years versus short-term policies that renew annually, Mr. Walker said, adding that, until the interest rate environment picks up soon, rates are facing strong upward pressure.
“Industry-wide, that would be an assessment I would agree with,” Mr. Walker said. “At some point, for insurance companies to get overall results, there is going to be some pressure on the overall business. I think there will always be pressure when you’re in this type of environment.”
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