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The prolonged low interest rates fostered by the Federal Reserve are slowly strangling the insurance industry. Nicole Friedman and Leslie Scism report for The Wall Street Journal:
Insurance is a cyclical industry. During periods without catastrophic claims, insurers compete for customers by lowering prices. Following large natural disasters or other big losses, they typically raise prices or reduce exposure to certain risks.
The current price increases are partly due to hurricanes, wildfires and other catastrophes in 2017 and 2018 that cost the global industry more than $200 billion.
Even following these big events, insurers are well-capitalized and aren’t in danger of running out of money to pay claims. But insurers’ profits are being squeezed by low interest rates, which reduce income from the premiums they invest until needed to cover claims. They also face rising prices for their own insurance, so-called reinsurance.
“You keep hoping things are going to get better,” said Bret Ahnell, executive vice president at FM Global, a specialist in property insurance.
Prices charged by FM Global declined steadily between 2003 and mid-2018 before starting to move higher. Industrywide, “people just finally said, ‘We can’t operate under these conditions anymore,’” Mr. Ahnell said.
Insurers say they are also paying more for noncatastrophe claims. Property losses from building fires and mechanical breakdowns have mounted, said Joseph Peiser, global head of broking at Willis Towers Watson.
Some insurers have responded by reducing the maximum coverage they will provide in a policy, he said. “Insurance companies are not willing to take a significant bet on any one company,” he said.
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