UPDATE: I found a wire version of the story that ran in another newspaper. For as long as it lasts, here is the link.
A Wall Street Journal story yesterday (sorry, no link, the WSJ is a paid subscription site) makes a point I’ve talked about a number of times. Here are the first three graphs:
The world seems awash in risk: nuclear rumblings in North Korea, bloodshed in Iraq, bird-flu scares, terrorism, hurricanes, corporate scandals, political uncertainty and more. But one barometer of risk — the price of insurance — indicates that many facets of life and business are getting less risky.
Insurance is a hedge against risk, and in many areas it has gotten cheaper lately.
Homeowners’ insurance costs are falling in many parts of the nation. Car-insurance prices are rising at a slower rate than inflation. This year, companies are spending less than they did in 2005 to protect themselves against injuries to their employees, lawsuits aimed at directors and officers and liability claims in general. The cost of some life insurance, too, has fallen in recent years, as has insurance against terrorism.
Insurance is a cyclical business where prices go up and down depending on competition and losses. It is also not unheard of for insurers to price their products wrong. When the industry changed over from primarily insuring fire and casualty to liability policies, many insurers didn’t have the actuarial experience to price them correctly. They also didn’t count on long-tail environmental liability, or that their policies would be found to cover things like clergy sex abuse, and partly as a result of these factors, a number of insurers, some of them among the largest, went out of business. However, on the type of lines discussed in the story, insurers have abundant pricing experience, so the premium drops aren’t likely to be a mistake.
Another paragraph from the story:
The insurance-price declines come at a time when insurers, helped by healthy returns on their investments and the fact that the latest hurricane season passed without major damage, are reporting booming profits. On Friday, Berkshire Hathaway Inc., which sells catastrophe reinsurance and also owns Geico, the big auto insurer, reported a more than fourfold increase in third-quarter net income. Allianz SE, the German insurance giant, said last week that its quarterly net profit doubled.
Increased profits means insurers have some margin to experiment with pricing. Another phenomenon one can observe is the ubiquity of insurance products as insurers have discovered research into consumer’s risk analysis. People tend to underestimate the chances of common risks occurring, and often underinsure against them, but at the same time, vastly overestimate the chance of catastrophic but very unlikely events and overinsure against them.
Back in the day when I reported on crime in Phoenix, Arizona, I noted that the neighborhoods that were the safest and wealthiest had the most fear of crime and the most demand for police protection, in addition to their private security forces. American society in general has reached the equivalent point: people like my grandfather, Albert Thomas Rossmiller, doing what he could to scratch a living from the land in Wildrose, North Dakota, living in some tarpaper shotgun shack, eventually with six sons and six daughters to feed, didn’t worry about the little things. This was in the day when, if you had 12 kids, you might lose six to accidents and disease before they turned 5. Yet he and my grandmother lost only one, the oldest, Harvey, who was 13 months when he died of diphtheria. As a measure of how much safer life has become, who even knows what diphtheria is anymore? I’ve walked those country graveyards out in NoDak, and I can tell you that 80 to 100 years ago, rare was the family who saw every child live to become an adult. How many parents do you know who have lost a baby to disease? As society has become richer and safer, it not only can afford more insurance, it has a demand for more insurance.