Originally Posted by Art
Few years ago when east coast hurricanes caused massive marine damage - my west coast insurance cost doubled! I understand "spreading the risk", but, my boat is kept deep inside m-e-l-l-o-w SF Bay Delta fresh waters - under covered floating dock. Sudden 100% rise in cost to my ins. was/is a bit much! I wonder if boat ins. in hurricane areas increased same %age... or more???
Art, the answer is Yes. However, we do appreciate your contribution. I can assure you that it went to a good cause.
Insurance companies operate under the "law" of big numbers. In other words, sharing the risk around. There are a lot of things that affect insurance premiums. Casualty losses being one. One of course is market competition. Something that is not really thought about much is investment income. When investment income is rolling along policies can be written at cost of claims plus overhead, and still make a nice profit from the invested premiums. Let's say that overhead runs about 30-35% of premium. That covers all agency commissions and company overhead. Claims expense is considered a cost of the claim. When the market competition will not allow premium increases they will sometimes lose money for a year or two. When the market hardens premiums will go up greatly to recover losses. We will see a soft market again. The companies will have to get hungry again, and the economy will need to get back to normal.
There is another little thing that has great affect on premiums. The state insurance departments have some fairly strict requirements on liquidity. This can bring an increase in premium to bring ratios back in line. A bad year of claims can be bad for everyone.