Soft P&C Market Competition Drives Down Insurance Costs

Last updated on May 13th, 2019 at 02:36 pm

Property and casualty insurance rates for southeastern Wisconsin will continue to decline this year as insurance companies continue to fight for marketshare in the state, according to local insurance executives. Property and casualty rates went down about 6 percent in 2005, said Ben Salzmann, president and chief executive officer of Sheboygan-based Acuity Insurance.

"Rates are going to continue falling for another two years," Salzmann said. "Then the weak insurance companies will go insolvent and get bought. Then rates will start going back up."

The last soft market for property and casualty insurance rates lasted about 10 to 15 years during the late 1980s and 90s, said Kevin Steiner, senior vice president of marketing for West Bend Mutual Insurance Co.

This soft market will not last that long because of lower interest and bond rates, he said.

"The return on investment for insurance companies is far less today than during the last soft market," Steiner said. "Lower interest rates may make this soft market much shorter than the last."

Southeastern Wisconsin businesses are benefiting from a competitive insurance market in the state. The lack of catastrophic weather events in the Midwest and the state’s mostly favorable regulatory environment for insurance companies makes it an attractive place for insurance companies to do business.

"In the insurance industry, we’re one of the more friendly states for regulation," said Roy Bubeck, president and chief executive officer of Milwaukee-based Badger Mutual Insurance Co. "The regulatory market in Wisconsin encourages competition. That allows and encourages companies to go at each other, and you have a lot of medium-sized insurance companies fighting for marketshare and business. A relatively friendly regulatory environment allows us to compete with each other."

While welcomed by their customers, the softening property and casualty insurance rates present a challenge for the insurance companies. Still, area property and casualty insurance companies enjoyed strong financial performances last year.

Acuity had $746 million in direct written premium (revenues) in 2005, and $104 million in net income after taxes. The company has 800 employees, including 600 at the Sheboygan headquarters, and total assets of $1.7 billion. The company operates in 14 states, after entering Kansas and Tennessee in 2005. Later this year Acuity will begin doing business in a 15th state, Arizona.

Last year was the most profitable year in Acuity’s history, Salzmann said.

West Bend Mutual had $630 million in direct written premium in 2005, up 5.6 percent from 2004. The company has $1.3 billion in total assets.

Badger Mutual also had its best year ever in 2005, Bubeck said. The company had $105 million in direct written premium in 2005, up 5 percent from 2004 and up from $67 million in 2001. The company has $158 million in total assets.

"Despite falling prices, we still, and most of our competitors in the Midwest, all had very good years," Steiner said. "We’re still in a period of adequate pricing and have had few catastrophic storms (in the Midwest) in 2005 and in the last four years. The market has been gradually, but persistently softening over the last 18 months. As long as the gradual doesn’t turn into severe, we are forecasting another profitable year in 2006."

Nationally, the insurance industry is struggling with workers compensation and general liability claims, Salzmann said. The insurance industry is paying out $106 for every $100 it brings in for workers compensation and is paying out $119 for every $100 it brings in for general liability.

However, Acuity has been able to make money in workers compensation and general liability, Salzmann said. The company has a different philosophy than many other insurance companies, he said. Instead of fighting over what costs are going to be covered, Acuity covers upfront costs to get people healthy and back at work.

For example, workers who have suffered an accident immediately receive a credit card from Acuity to pay for their medical expenses. Insurance companies that fight over what they will and will not cover drag out the recovery process and end up costing themselves more, Salzmann said.

The success of Wisconsin insurance companies has resulted in growth necessitating expansion of their corporate offices.

West Bend Mutual is planning a major expansion of its 150,000-square-foot headquarters at 1900 S. 18th Ave., West Bend. However, the project is going through numerous changes and has not been approved by the company’s board of directors, West Bend executives said.

In 2004, Acuity completed a $45 million expansion of its headquarters along Interstate 43. The project expanded the 160,000-square-foot office building to 440,000 square feet.

National insurance companies, which serve the coastal areas, took significant hits from last year’s hurricanes, especially Hurricane Katrina, which hammered New Orleans and the Gulf Coast.

"The hurricanes really damaged the national insurance companies," Salzmann said. "These national insurance companies already had to pay out $30 billion for asbestos lawsuits. The hurricanes added another $60 billion. This is making the national insurance companies twitchy. They are behaving weird, coming into some markets and going out of others."

"Those companies with heavy exposure on the coasts are looking to do business in the Midwest as a place to do business," Steiner said. "That means more competition, which drives down prices."

Insurance companies in Wisconsin, such as Badger Mutual, West Bend Mutual and Acuity, which concentrate on the Midwest and do not serve the coastal areas, have not been affected much by the hurricanes.

Re-insurance companies, which insure the insurance companies, have not been able to spread the costs from the hurricane damage to insurance companies that serve the Midwest because of the competitive environment here.

"The re-insurers will charge the nationals a lot more money," Salzmann said. "The problem is they can’t charge the Midwest more because they all want to write Midwest insurance companies with no coastal exposure. What we do is get multiple bids (for re-insurance). We bring in competitors. Our re-insurance only went up 0.1 percent last year."

National insurance companies with coastal exposure had their re-insurance rates go up by 30 to 100 percent, Steiner said. Insurance companies with coastal exposure that did not experience losses from the hurricanes had their re-insurance rates go up by 10 to 20 percent. Insurance companies that do not serve the coastal areas had their re-insurance rates go up five to 10 percent.

"We saw very little impact of Katrina on our re-insurance," Steiner said. "We don’t have to deal with that yet. But if we have another year of (hurricanes), re-insurers may decide to spread the cost."

The severe storms that hit the coasts will make those areas less attractive for insurance companies to provide coverage. That means residents and businesses on the coasts are just going to have to pay more for property and casualty insurance, Salzmann said.

"The people on the coasts laugh at people in Wisconsin," Salzmann said. "They ask us why we live in Wisconsin, because it’s so cold. Well, we don’t have earthquakes. We don’t have hurricanes. We have a low cost of living. We have lower crime rates. And we like the change of seasons. Other than that, I have no idea why we live here. If they want to live on the coasts, fine. They are going to have to pay higher insurance costs. They have to pay more, just like we have to shovel snow."

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