@DrBob2 so how do you explain this DB2? If insurance companies do not raise rates in other states because they are all run by different PUC’s how could an area that has not had any catastrophic events go up 50% in one year?
The reason I am skeptical is that companies have a hard time losing money and will always find a way to make it up. While each state has it’s own PUC a lot of those are toothless.
Andy
Every state has had a catastrophic event over the last year! That event is interest rates rising rapidly and dramatically. It means that almost all the investments insurance companies hold have gone down in value. The basic equation for insurance is.
I + P = C + E + profit
Income (from float) + Premiums = Claims + Expenses + Profit
In order to keep thing balanced, if income goes down, then premiums have to go up.
Yeah, but that loss in value is mostly irrelevant. They usually hold the bonds to maturity, so interim fluctuations don’t affect their bottom line. The insurance company will collect exactly the interest they expected to get when they bought the bond.
—Peter
Right Mark but 50%, doesn’t that seem a little excessive in one year for an area that has not had a catastrophic event. I don’t know how the insurance companies work over all but this does sound like they are spreading risk over multiple states.
Andy
What about the rest of the state? It is the payouts incurred over the entire state, not just in a few areas. Yes, interest rates are up, but that is irrelevant (because holding any investment instrument to maturity means no investment OR income loss).
That’s exactly part of the problem! They’ve also been dabbling in other investments, natural because treasury bonds had such low yields, so they may have invested in PE, in CRE, and other various esoteric instruments. Meanwhile, the yields they locked in on treasury bonds are low, the other investments aren’t performing all that well, AND the cost of claims are going up due to inflation (everything from roofs to labor to auto parts are going up). The high interest rates affect everything in their business.
50% is definitely excessive, but likely the insurance company expects to suffer with their low yielding investments (and higher cost of claims) for many years, and they may think they only have one bite at the apple for hefty rate increases from the local insurance commissioner. Plus experiencing 15-20% inflation over the last 2 years scares them. They need a few years of premiums exceeding costs so they can invest that excess float into currently available higher yielding long-term bonds.
Good point Jerry. They come in at 24th state with most disasters since 1953, but maybe they think that is going to increase because of more storms?
https://worldpopulationreview.com/state-rankings/natural-disasters-by-state
Andy
I do not think this is being driven by disasters or by interest rates or by float issues.
The insurance industry insists that the state’s risk from hurricanes is only part of the problem, and points to a legal system it says promoted litigation abuse and excess claims.
“This is a man-made crisis,” said Mark Friedlander, spokesperson for the Insurance Information Institute, who is based in Florida. The insurance industry pushed for and won a number of reforms meant to curb what it saw as abuse, but so far it hasn’t changed the outlook for insurers, partly because of a flood of nearly 300,000 lawsuits the III said was filed just before the law took effect.
https://www.cnn.com/2023/06/01/business/florida-homeowner-insurance-rates
As noted, the income from float (one of Buffett’s favorite item) varies from year to year. In addition, because of inflation and labor shortages the costs to repair damages have increased. Also, if the insurance companies can convince the state that catastrophic events could occur (even if they haven’t) then the state could allow them to raise rates proactively.
DB2
Our agent got back to us this afternoon with the fact that all companies have popped up insurance rates significantly. I suspect it is because they can. Told our Realtor that much higher insurance rates are going to have impacts on affording mortgages for her buyers. Expect to see large increases when your policies renew.
IP
I’m in Kansas and our rates went up 7%.
American Family sent out a letter about 2 months prior to renewal saying rates would be increasing. I didn’t keep the letter because the reason didn’t matter; but I believe it said the reason was due to increased costs on claims. I’ve never had a claim with them, so it wasn’t personal.
Another reason is other insurers pulling out of the state, increasing the risk on the remaining ones. Not sure if that’s happening where you are but “we will all hang separately”.
OK, but they hold the bonds in case there is catastrophic coverage required, over and above what the premiums bring in. In that case they have to resort to reserves, which is usually bonds. They have other investments of course, notably real estate (the biggest buildings in every city always seem to have an insurance comnpany’s name on them) but that’s illiquid. Bonds is what gets them through a bad year.
Buffett has noted that Berkshire has had years where the premiums didn’t cover claims (as you would expect with a lumpy business), and those payouts have to come from somewhere.
True. But they also carry reinsurance which limits their need to dig too far into reserves. (We’re still talking front line insurers, aren’t we? )
So they can pick and choose which investments to sell. They almost certainly won’t need to sell all of their investments.
—Peter
He is really too young and immature to know what he is doing. He is also the sort that never grows up.
Florida will a woke eventually. Everyone else intelligent does.
I didn’t think they would need to sell “all”. The reinsurance market is vastly smaller than the primary market ($500B to $5T, according to Google), so presumably most losses are borne by primary carriers, who try to predict what/where disasters will happen and price accordingly. Buffett has said that his insurance operations operate at or near break-even, with the profit coming from the ability to invest the float - the time gap between premiums coming in and payments going out. Some years, oops, bad estimates and/or more disasters.
So let’s say you only need to sell 5% of your bonds to cover. But let’s also say bonds are down 15%, as has happened this year. You therefore have to over-diminish your stash into order to get to even - and getting to even is not exactly a great accomplishment in the business world. Now, looking at the next year, you have diminished resources and worries about another catastrophic cycle.
Given the (seemingly) increasing nature of disasters - from wildfires in the west to hurricanes on the coast (esp Florida), tornadoes in the Midwest and flooding in New England (!) I can see that being an insurance company executive night be stressful at the moment. Therefore they deserve multi-million dollar payouts.
Just kidding.