Earlier I made a comment about the fact that there has been little hurricane activity this year and that this is going to create pressure to reduce insurance rates. Ted Frank in a comment pointed to the fact that someone was already calling for reduction in prices. However, this person was using the rational that the insurance industry earned $60 billion in profits for the rationale to cut prices. The proper metric is not profits in dollars, but rate of return. The industry needs to make money in order to attract capital. The rate of return on the money invested is the true metric of profit. If the rate of return is fixed at, say, 8 % (as some people would like) , then investors who could make more elsewhere will never place their investments in insurers. If that were the case then there would be massive insurance shortages everywhere. Right now the shortages are confined to seriously price regulated states like Florida.
I know that there are lies, damn lies and statistics and that by varying the dates a little bit one might get a slightly different outcome than in the above figure. I chose as the starting year the time period before the recent hurricanes started and I ended on Halloween of this year.
(click for better view)
If we look at broad market indices, we see that the property casualty insurance business is not out of line with these indices. The data come from a subscription only service (www.snl.com), but one might replicate something similar on publicly available sites. The bottom line is that insurance profits are not really out of line with other profits. If the market is competitive that will always be the case. Also, note that these results are for a set of publicly traded p&c companies representing all lines of business.
To live from hand to mouth... Hamond
Posted by: Hamond | November 30, 2006 at 04:28 AM