Insurance premiums rise on sour profits, market returns
— -- Home, car and life insurance prices are climbing as insurers grapple with lower investment returns and profits.
The cost of a typical auto insurance policy will rise 4% to $875 this year, on top of a 3% increase last year, according to the Insurance Information Institute, a trade group. Consumers also will pay more for homeowners insurance: The average policy will jump 3% to $841. And term life insurance rates are rising after several years of declines.
The price increases come as consumers struggle — the unemployment rate has reached 8.5%, and household wealth has plunged with investment portfolios and home prices.
In this economy, "Anything that costs more is difficult for consumers," says J. Robert Hunter, director of insurance for the Consumer Federation of America.
The industry's profits come from insurance policies and investment returns, says Terri Vaughan, chief executive of the National Association of Insurance Commissioners. That's why, "If your expectations for future investment income are lower, that's going to affect premiums."
Insurers collect premiums from consumers and invest the majority in bonds, the rest in stocks. Their portfolios have been under pressure amid volatile stock and bond returns.
For instance, yields on ultra-safe Treasury securities — in high demand amid the economic turmoil — plunged in 2008. Meanwhile, the Dow Jones industrial average is down 43% from its all-time high of 14,165 on Oct. 9, 2007. Treasury securities and stocks have regained some ground recently, however.
As the economy weakens, insurance rates could climb further. Insurers "cannot assume that interest rates will be much higher and stock returns much better in the foreseeable future," says Robert Hartwig, president of the Insurance Information Institute.
In the life insurance industry, weak profits, higher reserve requirements and increased capital costs are reversing a more than decade-long trend of falling term life prices, says Byron Udell, chief executive of AccuQuote, an online insurance broker.
