Economy: Risky Business

Sustained growth in the demand for property and casualty insurance products means that market conditions will remain firm in 2014, despite record underwriting capacity, and will allow Georgia’s insurers to increase premiums.

Although competition is intense, solid demand growth will allow insurers to maintain or improve underwriting discipline, which will be essential to profitability – given the low rates of return expected on low-risk types of financial assets.

Insurance premiums will increase moderately, even as overall demand for personal lines of insurance increases significantly. Barring major catastrophic events, property and casualty insurers are very likely to earn record levels of underwriting profits on personal lines in 2014.

Georgia insurers should not count on large gains in investment income to significantly reinforce their underwriting profits. Insurers recognize that the returns on investments could be low for an extended period, raising the importance of underwriting discipline. Yields on relatively risk-free types of long-term bonds will increase slightly in 2014, but will still be extremely low. Although rates on riskier categories of bonds are much higher than on treasuries and the prospects for real estate price appreciation are good, insurers’ profits will not benefit too much from such trends, as they hold too many risky assets in their investment portfolios.

The year will see an increase in demand for property and casualty insurance, with automobile insurance leading homeowners insurance. My forecast calls for more spending by households for categories of high-priced durable goods, which will cause demand to grow for property insurance products.

The upcycle for housing began in 2012 and broadened significantly in 2013, providing a substantial boost in the number of new homeowners’ and title insurance policies written. Home prices are expected to rise moderately in 2014, which will lead to increases in insured amounts. The proportion of households unable to make their mortgage payments will diminish. Consequently, claim rates on home insurance policies will decline. Loss performance will improve since there will be a smaller proportion of foreclosed and vacant homes.

As Georgia’s recovery broadens, demand for commercial lines of insurance purchased by businesses will increase. The leaders will be workers compensation and liability. Nonetheless, intense competition will prevent premiums from rising for most commercial lines.

The demand for life insurance and related products has been lessened by job losses. Policy lapse rates rose, and participation in employee benefit plans declined; policy loans increased. These adverse trends finally turned for the better in 2011-13, and further improvement is expected in 2014, as are rate increases.

A number of factors will tend to reduce the need for traditional life insurance – among them longer life expectancy, later first marriages, fewer children, lower levels of household debt and lower home ownership rates. Yet longer life expectancy implies lower mortality rates, which potentially can increase insurers’ profit margins on term life insurance; the baby boomlet should stimulate demand for traditional policies. Sales of retirement-oriented products should benefit from longer life expectancy and less generous employer-paid pensions.

Annuities are the primary source of the industry’s premiums, but low interest rates have restricted their growth. Nonetheless, decreases in the death rate make annuities more valuable. People are increasingly worried about outliving their assets in retirement. Annuity sales will also benefit from a trend toward retiring at an older average age. As insurers focus more attention on wealth accumulation products rather than traditional insurance against premature death, the insurance industry will face more competition from financial institutions and wealth management companies.

Companies that provide financial planning and investment services will benefit from this interest in retirement planning. Life insurers are expected to provide a broader array of services and are especially likely to emphasize financial planning for retirement rather than simply income protection.