In the midst of recession, the cost of car and home insurance is increasing for many Georgians. And if past trends hold, insurance bills could rise more significantly once the economy recovers.
Spurred by hefty losses last year due to storms and the financial crisis on Wall Street, insurance companies have been raising their rates in Georgia and other states this year.
Four of the largest insurance companies operating in Georgia are raising their average rates on homeowners’ insurance by between 5 percent and 11 percent this year, according to the Georgia Department of Insurance. The agency-approved rate hikes by State Farm, Cotton States, First Liberty Insurance Corp. and Nationwide Mutual Fire Insurance affect almost four out of 10 homeowners in the state.
State Farm, which has the largest presence in the state with almost 30 percent of the homeowners insurance market, boosted its average rate by 5.6 percent in January. Most of the other premium hikes have taken effect; First Liberty’s 9.3 percent increase takes effect July 21.
Auto insurance rate increases have been more modest. So far this year, the median rate hike —- the midpoint among the rate changes filed by roughly two dozen companies —- has been 2.4 percent.
Even with such increases, Georgia Insurance Commissioner John Oxendine said consumers are doing better than those in neighboring states, where he said premiums have been rising at double-digit rates. “We are by far the cheapest in the Southeast,” he said.
Insurers, which are regulated at the state level, have been raising rates in other states, including Illinois, Texas and Florida, though some rates have fallen in Ohio and other states, according to press reports.
Just as with the overall economy, it’s still unclear which way insurance premiums are headed, say some industry experts.
“The situation at the moment is a little bit complicated because supply and demand are both moving,” said Michael Murray, assistant vice president of financial analysis at the Insurance Services Office, a New Jersey-based company that tracks industry statistics.
Murray said the decline in insurance costs over the past year seems to be slowing, “but it’s hardly started to turn up yet.”
The federal Bureau of Labor Statistics’ price index for homeowners’ insurance rose a “very modest” 1.9 percent in April compared to a year earlier, he said. The similar index for auto insurance was up 4.7 percent during the same period.
Martin Grace, a Georgia State University professor of insurance and risk management, said homeowners’ insurance rates are likely rising along the coastal areas of Georgia and other parts of the nation that are vulnerable to hurricanes. “Georgia hasn’t had large losses but the models may be predicting that,” he said.
Oxendine said the state’s insurers are feeling pressure to raise rates after suffering investment losses like other insurers, plus claims for roughly $500 million in damage from last year’s tornados in the state.
Grace said the state’s rates for homeowners insurance may also be rising faster because insurers could be playing catch-up to increase rates from below-average levels.
Indeed, Georgia homeowners’ typical premiums were below the national average, at $703 vs. $804, according to the National Association of Insurance Commissioners. The comparison is for 2006, the latest data available.
Georgians paid higher than the national average for auto insurance, according to the organization. The average premium in Georgia was almost $965 in 2006, vs. $937 nationally.
Rising costs of auto repairs, rather than last year’s changes in how auto premiums are regulated in Georgia, are the likely cause of increasing auto insurance rates this year, said Grace.
He predicted that competition among auto insurers, who are now free to set their own rates as a result of last year’s change in the law, will decline for low-risk drivers and rise for riskier drivers. But it could take a year or more before such trends become apparent.
Demand, supply fluid
Meanwhile, he and other experts believe insurers will continue to have a tough time raising revenues by much this year because the recession has withered customer demand. While customers still need to insure their cars and homes, they aren’t exactly jumping to buy newer, more expensive cars or bigger homes that might boost their insurance bills.
Last year, property and casualty insurers’ revenues dropped by more than $6 billion nationwide.
However, Murray noted that the “supply” side of the equation also has been moving dramatically over the past year as well. That is making it difficult to predict which way insurance prices might head over the short term, but if history is any guide, it could mean more rate hikes will be coming later.
The reason: Last year, losses on investments and on damages from storms such as Hurricane Ike, which struck the Texas coast, wiped out much of insurers’ capital.
Murray said insurers reported almost $73 billion in capital losses on their investments last year as a result of the crisis in financial markets. The industry also reported more than $26 billion in so-called “catastrophe” losses from storm damage and other claims.
As a result of those losses, insurers had less capital going into this year. That reduced the supply of capital they can use to finance future insurance contracts with customers. Last year, the industry’s net worth dropped to $456 billion from almost $518 billion at the end of 2007.
Partly because of such up-and-down swings in available capital, property and casualty insurance companies typically go through boom-and-bust cycles, alternating between “soft” insurance markets, when insurance is available on easy terms, and “hard” markets when insurance is tougher to get and rate increases spike.
Often, those spikes have come a few years after the nation emerged from a deep recession, industry and government data indicate.
Industry revenues —- measured in terms of net premiums —- surged to annual increases of more than 20 percent a few years after the deep recessions in 1973-1975 and 1980-1982, according to data from the Insurance Information Institute, a trade group. A smaller spike in revenues came in 2002 and 2003, after the 2001 recession.
Murray and Grace said such figures are an indicator of the insurance industry’s economic recovery as business activity and demand for insurance rebound following a recession.
“It doesn’t necessarily mean that prices go up,” said Grace.
Recession a factor?
However, the federal Bureau of Labor Statistics’ price indexes for both motor vehicle and homeowners insurance also spiked a few years after those recessions, sometimes rising at dramatic rates.
According to the federal statistics, the cost of motor vehicle insurance shot up almost 29 percent in 1976, and rose at double-digit rates in 1985 and 1986. The rate of inflation for both homeowners and auto insurance also peaked after the 2001 recession, but at less dramatic annual rates of 5.6 percent and 8.8 percent, respectively, a year or two later.
Murray, the Insurance Services Office economist and financial analyst, said those historic peaks in insurance costs don’t necessarily point to a repeat after this recession ends. He said those earlier spikes were tied more to specific events that affected the insurance industry than to the recessions that occurred around the same time.
Insurance companies suffered “horrific losses” on investments in the early 1970s that wiped out a third of their capital, he said. In the 1980s, he said, the companies had to recover from heavy underwriting losses —- essentially losses from selling insurance too cheaply for the risks they assumed. And the Sept. 11, 2001 terrorist attacks resulted in tens of billions of losses for insurers, he added.
Losses from hurricanes and plunging investments made last year the insurance industry’s worst since 2002, but the industry had plenty of capital to absorb those losses, he added. But it could get rough “if we do get another Ike or Katrina or the market tanks,” he said.
How we got the story
The AJC interviewed insurance industry sources at the Georgia Department of Insurance, Insurance Services Office, Georgia State University and National Association of Insurance Commissioners. The AJC also collected and analyzed data from state insurance regulators, the Insurance Information Institute and the federal Bureau of Labor Statistics.
Rate changes by the largest home insurers in Georgia
Company Market share (pct.) Rate change (pct.)
State Farm 30.0
Georgia Farm Bureau
Charter Oak Fire
First Liberty 2.4
Source: Georgia Department of Insurance