Insurance Premiums: Hope in Sight

The experts see the insurance crunch easing -- they just can't agree on when it will happen, or by how much

Over the past two years, small businesses have seen their insurance premiums take off like a space shot. As the accelerating weight of ever-increasing rates presses down more strongly on entrepreneurial outfits, many business owners have been longing for this rocket ride to reach its apogee and begin a welcome descent. Indeed, some have even taken to wondering if premiums are destined to remain sky high for years to come.

Here's the good news -- maybe: Those soaring premiums might have fired their last booster. Barring a spate of unforeseen catastrophes -- a natural disaster or September 11-style terrorist attack, for example -- insurers could shortly find themselves in better financial positions to compete. At worst, this would mean stable premiums. At best, the possibility of a reduction in the rates that have been squeezing small businesses.


  And not before time, either. For the fifth consecutive month, insurance costs have been rated the chief problem confronting business owners by the National Federation of Independent Business (NFIB), whose Optimism Index for September found that 24% of respondents listed premiums as their greatest concern.

Depending on the type of coverage, premiums have grown by 30% to 100% over recent years, according to William Dunkelberg, NFIB chief economist. "We've had terrorist terrorists, we've had weather 'terror,' we've had stock-market 'terror' -- we've had a lot of losses that the insurance companies had to cover, and the reserves took a real hit," he says. "Regulators have said to insurers, 'Get your reserves back up!' The only way to do that is to charge more, and that's what they've been doing." According to Dunkelberg, 2004 may see a turn for the better, in part thanks to the recent bull market on Wall Street, where insurers' portfolio gains have "helped to re-fund some of the reserves."

Paul Newsome, senior insurance analyst at AG Edwards, agrees with Dunkelberg in general, but differs on both the likely timeline and size of decreases, if any. Business owners may have to wait until 2005 to witness an improvement, he says -- and even then, it's likely they won't see the sort of cuts many long-suffering entrepreneurs would like. "If insurers are able to earn enough in this year, they could lower prices and still remain profitable," says Newsome, adding: "I would imagine, though, that you're going to see one minor round of general price increases next year…and then, in 2005, you'll probably see pretty level prices."


  Newsome further agrees with Dunkelberg that a recovery in the stock market could help rebuild the insurance industry's reserves and, ultimately, enable lower premiums. In the short term, however, he doesn't see the bull market as a major factor. The reserve crunch owes more to premiums that were unsustainably low during the late 90s than it does to the $40 billion in insurance payouts after September 11, he says.

"Insurance is a cyclical business," notes Newsome. "It has a tendency to become overly optimistic about its prospects in certain periods, and then go the other direction." When it comes to small-business owners, optimism or pessimism is beside the point. All they want is for the premium pain to end.

By Edward Popper in New York