What's The Recession Doing To The Insurance Industry? Article

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What's the recession doing to the insurance industry?

The article looks at the recent annual report issued by State Farm showing a swing from a big profit in 2007 to a $500 million loss in 2008. The good news is that they have begun to reduce their premiums in 2009.

Author: Davidmayer

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When you’re sitting at home worrying about the mounting pile of bills to pay, it’s easy to lose sight of the big picture. Fact is, just as you’re in a new world of hurt, there are other people hurting as well. In this case, the people are the inventors in the insurance industry. They all bought shares in these big corporations when the prices were high, never thinking that the world could suddenly turn sour. Although it’s a mutual insurance company, let’s take State Farm as an example of what’s happening across the industry. This is one of the biggest insurance companies in the US and it’s just turned in an operating loss of $542 million for 2008. Its net worth just dropped a whole 16%. Now, you have to understand this company did not get caught up in mortgages of any prime. There were no securitised thises or derivative thats. This company has just been caught in the general collapse of stock exchange values.

To understand, we need to look at how insurance companies work. They charge most policy holders with a vehicle or a home a monthly premium. This brings in a small mountain of cash every month. That money is invested until it’s needed to pay out on claims. Some goes into fixed-income products. The rest goes into shares. As you may have noticed, the Dow and other stock exchange indexes have been in free-fall. The result is that State Farm has lost the capital value of the investments and, in many cases, no longer receives any income as interest or dividends. This might have been manageable except for this little thing called global warming that no-one believes causes hurricanes and other weather catastrophes. The last two years have seen an big increase in weather-damage claims. Put the loss of investment income and the unexpected rise in claims together and you turn a $5.46 billion profit in 2007 into a loss in 2008.

Should this make you worry? Well, look at it this way. The insurance industry is suddenly making a loss. Shareholders in general and the policy holders in State Farm are not happy. Senior officers of the companies want their bonuses. The for-profit companies are tempted to raise the premiums across the board to get their earnings back into profit. Except with a recession threatening to turn into a depression, that’s not going to work. Make the policies unaffordable and people stop buying. That’s why State Farms just dropped its auto insurance rates in Georgia by an average of 1.5%. For the record, this means the current premiums are 12% lower than five years ago. Since State Farms insures around one quarter of all vehicles on Georgia’s roads, this is a good deal. So the next time you’re shopping round for a cheap car insurance policy, you may be pleasantly surprised that the premium rates from an increasing number of insurers have fallen in other states. The next bill may not be quite as painful as you fear.

About Author

See what David Mayer has written on other topics by visiting http://www.allstatescarinsurance.com/recession-2.html, the site where he has frequent contributions and open discussions. David Mayer has a vast experience in the domain and will give you a better idea of it.

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What's the recession doing to the insurance industry?