Insurance Quotes & Advice

The insurance industry is faced with the outlook of declining investment income for the foreseeable future with the economy in it’s current state. The industry’s losses due to the collapse of the subprime mortgage market is expected to eventually surpass the claims paid out for Hurricane Katrina.

What most people don’t realize is that a large percentage of the industry’s profits are derived from investment income rather than insurance premiums. For the most part, insurance companies tend to price policies to closely match what they expect to pay out in claims. They usually do this in an attempt to gain market share.

Now, it doesn’t take a genius to figure out that companies aren’t around to just break even. Most companies will have a target rate for Return On Equity(ROE) that they wish to achieve. But with investment income declining something has to give.

Even in relatively good times for the industry, they are usually involved in a number of disputes with state regulators over insurance rates. I’d say you can expect some bitter fighting later this year when companies submit their next annual rate proposals.

Many states make it illegal for companies to raise rates to make up for a previous year’s investment losses. However, companies do submit estimates on their projected investment income when they file rate proposals. With those projections expected to fall, there will be a growing pressure for insurance companies to raise rates to compensate.

Losses from the subprime mortgage collapse are finally catching up to the insurance industry.

“The collapse of the subprime mortgage market will lead to record losses for insurance companies, overtaking Hurricane Katrina, the worst natural disaster in U.S. history.”

Insurance losses to date from the subprime collapse is estimated at $38 billion and is expected to surpass the $41 billion the industry paid out for Katrina.

American International Group, the world’s largest insurance company has been the hardest hit so far with writedowns exceeding $11 billion.  Even more troubling has been the losses for the bond insurance industry which have caused severe disruptions in the normally placid bond markets.

This has caused a spillover effect to the rest of the financial sector as many institutions have had to writedown losses due to bond revaluation in their asset backed portfolios.  Municipalities are finding it especially hard to issue new debt even with their stellar default history.

While the insurance industry has historically fared better the other business sectors during a recession, even it has failed to escape the virus of the subprime mortgage collapse that has infected so much of the economy.  With credit markets steadily growing worse it’s not known how high these losses could rise.

When Wellpoint Inc., the nation’s largest health insurer by membership, unexpectedly cut it’s earnings forecast for 2008, it sent ripples through the entire industry.  The stock fell by as much as 29% in trading Tuesday and it’s rivals didn’t fare much better.

Analysts across the country were scrambling to downgrade their ratings for the entire sector, as the announcement took Wall Street by surprise.  The industry as a whole was expected to perform well in a weak economy as it typically does, but many feel that is no longer a given.

The reason given for the revised forecast was blamed on rising medical costs, which many analysts fear may be an industry wide problem.  Healthcare costs have been outpacing inflation for decades and everyone expects that to continue in to the foreseeable future.

However, for Wall Street to be off by that much, should send alarm bells ringing to consumers because this unexpected rise in costs will eventually get passed on to them.  This comes at a bad time for many Americans who are already reeling from soaring food and energy prices.

The problem of healthcare in this country has been growing problem for decades, for consumers as well as the government.  Every year healthcare is taking a larger percentage of disposable income for Americans and a larger chunk out of the annual budget for the government to fund Medicare.

It’s ticking time bomb that no one has figured out how to defuse.