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For many, insurance becoming a bargain

Living in Florida, you may not have guessed that. But experts say it's a national trend.

By Wall Street Journal
Published November 7, 2006


The world seems awash in risk: 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.

The trend isn't universal. In hurricane-prone areas such as coastal Florida, homeowners still face higher insurance rates. And health insurance costs continue to soar because of spiraling health care costs.

But the widespread declines in insurance rates indicate that many risks that directly touch Americans' lives are on the decline. Car-collision claims have decreased in frequency, thanks in part to safer cars and safer driving. Workplace injury claims are down, in part because of improved technology. Americans are living longer, meaning life insurers often face lower odds of making big payments on the term policies they write.

Americans "are getting better at controlling risk," says Richard Zeckhauser, a professor of political economy at Harvard University. "In general, technological advance has made the world a safer place."

It isn't clear if these lower costs will persist. Insurance costs run in cycles. When catastrophes like Hurricane Katrina or 9/11 produce big losses, investors anticipate big increases in insurance premiums and flood the market with capital. That creates a glut, which intensifies competition and eventually drives prices back down. Another terrorist strike on U.S. soil or a major weather-related disaster could send rates higher again.

Aon Corp., an insurance broker, says the price of terrorism coverage has fallen sharply since the federal government created a backstop program in 2002 to help insurers manage their losses from any terrorism claims, but that rates have risen slightly over the past year.

Incidents of terrorism and hurricanes are less predictable than car crashes, making them harder for insurers to price.

The insurance price declines come at a time when insurers, helped by healthy returns on their investments and a slow hurricane season, 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.

Insurance prices shot up broadly after the Sept. 11 attacks and corporate scandals early in the decade as those events convinced insurers that the potential for steep losses was greater than they had realized. The recent price drops indicate insurers believe the world isn't as fraught with peril as it appeared to be in those days.

Workers' compensation insurance costs are down by a few percentage points; the percentage of employees with workers' compensation insurance who have reported work-related injuries fell by more than 45 percent between 1991 and 2005, according to the National Council on Compensation Insurance Inc.

In the auto market, insurance-price increases have slowed drastically. Between 1993 and 2002, firms that insure personal cars paid out more in claims and expenses than they took in from premiums every year but one. In 2002 and 2003, prices rose 8.8 and 7.8 percent, respectively.

However, collision claims have since fallen, in part because of technological improvements and stricter teen license requirements, says Robert Hartwig, chief economist at the Insurance Information Institute. Claims are down by between 1.7 percent and 5.1 percent in each of the past four years, according to data compiled by industry organizations.

Car insurers, in turn, have recorded underwriting profits three years running, according to both the institute and insurance-rating company A.M. Best Co. With the business becoming less risky, car insurance prices rose just 1.1 percent in September from a year ago, less than the 2.1 percent inflation rate.

[Last modified November 6, 2006, 23:21:50]

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