MARKET TRENDS
The insurance industry is cyclical. The cycle of the early and mid-1980s was among the most severe that the industry has experienced. That cycle centered on liability insurance. The hard market that began early in 2001 and has now passed its peak was unusual in that many types or lines of insurance were affected at the same time, including workers compensation. The insurance industry cycle is not unlike the cycle that occurs in agriculture, for example, in the wheat and beef markets. Demand for the product in both industries is relatively stable, and is relatively unresponsive to price changes, while supply can vary from year to year. This means that when supply increases, lowering the price will not instantly "clear" the market of excess supply. If the price of auto insurance is cut in half, people will still buy only one policy, although they may increase the amount of coverage they purchase

 

The cost of auto insurance is expected to rise by just 1.5 percent in 2005, the smallest increase in five years. The average cost nationwide is expected to be $870, an increase of $13 per vehicle from last year. Last year prices rose 2.8 percent. The number of claims filed continues to drop, in many cases offsetting the rise in claim costs, according to industry data for the third quarter 2004. Medical care and vehicle repair costs as well as higher jury awards for liability claims may cancel out savings from the reduced frequency of claims in some states.

• In an effort to improve competition, states are moving to deregulate commercial insurance rates. In Nebraska, the Senate is considering a bill that would effectively modernize personal lines also.
• While the number of homeowners insurance claims filed has been dropping, the average size or severity of losses has been rising. The average claim cost was $5,699 in the third quarter 2004, according to industry data, up 28.2 percent from $4,445 in the second quarter 2003.
• A 2005 study by the Insurance Research Council found that there is now a greater propensity to sue when there is an accident. Looking at 2003 bodily injury liability claims, the Council found that although auto accident rates and the seriousness of injuries have decreased, the bodily injury claim rate has increased. From 1980 to 2003, the bodily injury claim rate grew by 19 percent to 1.05 claims per 100 insured cars By contrast, the property damage claim rate decreased by 20 percent to 3.97 per 100 insured cars. In other words although fewer cars are reporting damage, more people are filing claims for injuries.

FACTORS AFFECTING MARKET CONDITIONS:

CATASTROPHE:  As in any other industry, the price and availability of insurance are governed by insurers' assessments of profitability.The build-up in insurable values together with predictions of greater losses is causing insurance companies and their reinsurers to reassess the magnitude of their loss exposure in these areas and to limit growth in geographical markets where their exposure to loss is too great. In addition to the risk of natural disasters, the insurance industry now faces the risk of terrorist attacks.

Distribution Systems: According to the Independent Insurance Agents & Brokers of America, Inc. the number of independent insurance agencies has fallen over the last decade. However, an increasing number of auto insurance companies are experimenting with multiple distribution channels. Several major companies in both personal and commercial lines business now use or plan to use both insurance agents and direct sale methods to reach consumers, including the Internet and phone. New insurance-related entities are springing up on the Internet. Employers are also expected to become major distributors of insurance products, offering auto insurance and other coverages through payroll deduction plans. Various organizations also distribute insurance to their members.

State Regulations on Withdrawals: Many states have regulations designed to minimize market disruptions when an insurer withdraws from a line of business, including restrictions on non-renewal of insurance policies and the termination of insurance agent’s contracts. In some states, particularly in the area of auto insurance, the balance between protecting the public and permitting freedom of trade has become tilted against insurers.

The Marketplace: A gradual change is occurring in the property/casualty insurance marketplace. There are fewer multiline companies – those sell both personal lines of insurance (auto and homeowners) and commercial insurance for businesses. Several personal lines companies are now selling products from other sectors of the financial services industry and many banks and some stock brokerage firms are selling insurance products. Some companies that used to distribute their products through their own employees are also using all distribution systems including direct response and independent agents.There is a growing divergence between these companies and small insurers with a more regionalized approach.