Are We in Serious Trouble?

I think we may be!

Those of us in the insurance agency business need strong insurance companies to sell for.  That’s obvious of course but it’s not something we think about every day.

I’ve been concerned for several years about the impact on the historically bad weather across the U.S. on our domestic insurance market.  I’ve written about this extensively.  I’ve also been concerned about the U.S. interest rate environment.  Low rates are good for much of the economy.

But, they are potentially disastrous for insurers!

Insurance companies have always received a significant share of their income, and most or all of their profits, from investment earnings on the premiums collected and not paid out in claims or expenses.  If we look at measures of interest rates as a proxy for investment earnings (and we can) we see that the U.S. interest rate environment is at its lowest ebb in nearly 150 years!

This is having dramatic impacts on insurer performance and stability.

The U.S. rating agency Fitch is projecting deterioration in underwriting performance in 2014.  A.M. Best has noted that its negative outlook for the commercial insurance industry has been in effect since 2011.

This week, in the “Insurance Journal” analyst Chris Burand wrote about Insurance Company Stability and points out that there are more insurer problems in hard markets (like we have now) than in soft.  He pointed out that the number of A.M. Best financial rating downgrades exceeds upgrades for the third consecutive year.  He also pointed out that significant reserve deficiencies exist and that some companies are worse than others.

So, are we in serious trouble?  Not today.  But we could be if more money – in the form of higher interest rates, lower claims costs or higher premiums – doesn’t begin to change things.  There are dark clouds on the horizon and the potential stormy weather bears watching closely.

It also bears preparation!  More on that next time…