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Long Term Outlook on Underwriting Profits

I had an op-ed yesterday's Washington Times about the rather dismal insurance situation along the Gulf Coast. A friend e-mailed me to challenge one statement I made. Here's what I said: "By design, insurance companies lose money on property insurance premiums and make it back through investments." Obviously, insurance companies seek to make profits (or excess) on every policy they write. These are called underwriting profits. But long experience in hurricane zones has made that very, very difficult. The profits insurance companies are getting now will be fleeting. Thus, companies do have to design their operations without the assumption of an underwriting profit. Many assume that more competition and less government regulation would result in higher underwriting profits. In the short term, this is probably true: current laws--particularly in high risk states like Florida--tend to reduce rates from those levels that the free market would demand. But the longer term, I think, doesn't look as rosy for insurance companies that want underwriting profits. Other financial services industries--banking, stocks, mutual funds--have seen enormous consolidation of the incumbent firms. This has tended to increase consumer choice as the bigger firms tend to enter new markets and drive down prices. And bigger firms are much more able to offer some services at a loss. Nearly all big service-oriented companies (e.g. those that sell something intangible) have a popular product that sells at a loss: free checking accounts, deep discount airline seats, increasingly, land-line telephone service. In the long term, I believe insurance companies could end up in the same place. And, since they already can survive without underwriting profits on some products in some areas, I would expect that more efficient companies will make this practice even more widespread.