Profits Lead to New Challenges

A Tough Balancing Act:

Higher Rates Lead to Record-Breaking Insurance Profitability but May Alienate Policyholders

A recent article in The Wall Street Journal described how many insurers are now getting back on track after suffering some of the worst years in their history.

The January 24 article, “Insurers Rake in Profits as Customers Pay Soaring Premiums,” highlighted the fact that Travelers saw record profits in its fourth quarter, leading to its stock hitting an all-time high. Progressive also reported that its profits more than doubled over 2022. Its stock surged on the news – also reaching new heights – and pushing Progressive’s market capitalization over $100 billion for the first time.

At first glance, this development is good news for insurers. After years of facing supply chain disruptions, inflation, higher repair and replacement costs, customers’ reluctance to take out additional policies, and other challenges, carriers are now returning to profitability, thanks to surges in underwriting and investment returns.

Rate increases are also expected to play a role, especially for home insurance premiums. In 2024, many insurers are planning to increase national premiums in the low double digits, although some states could see much higher prices.  For example, home insurers in North Carolina asked state regulators to approve a 42% increase in premiums, including a near doubling in rates for flood-prone coastal counties.

Yet to look at this news another way, these gains can come at the cost of real pains for home and auto insurance customers. Policyholders will now face much higher, even exponential prices for home and auto insurance.

Many others may have fewer coverage choices as insurers exit from disaster-prone states they deem too risky, such as California and Florida. Hartford Insurance Services Group is the latest insurer to say it will no longer sell new home insurance policies in California, following the lead set by Allstate and State Farm.

“Insurers kicked their rate hikes into high gear in 2023, which has been thrilling to investors,” said Douglas Heller,” Director of Insurance at the Consumer Federation of America in The Wall Street Journal article. “But for everyone who has to buy coverage, it has been very difficult.”

A Slippery Slope

While insurers are reaping the benefits now, it’s conceivable that these rate increases could lead to unhappy customers.  They may drop coverage they don’t really need, or worse, take their business to a cheaper provider or even an aggressive new insurance startup.

Now is not the time for insurers to rest on their laurels. Maintaining target retention levels and current profitability – and staying a step ahead of competitors who could get it wrong – now requires much more intelligent pricing, rating, and underwriting decisions.

Insurers need to do all they can to assess risk and determine precisely the right price or rate in order to win the most business possible and maximize profitability. Yet they must also be careful to consider the price elasticity of demand part of the equation, or in this case, customers’ willingness to accept higher prices (higher demand) versus their desire to shop for a new policy (lower demand).

For insurers who get it right, they stand to increase revenues, profits, and customer retention, while even positioning themselves to win new business from competitors who may be shooting in the dark. But if they don’t, they could find themselves on the losing end and could suffer the loss of once-loyal – and profitable – customers.

Balancing Higher Rates with Customer Satisfaction and Improving Insurance Profitability

How can carriers maximize insurance profitability and minimize customer turnover in 2024? The first answer is to look at what they can’t do, which is to continue to rely on manual processes (rate cards and spreadsheets) or legacy technology that simply can’t get the job done. 

Not only are these approaches too inefficient, cumbersome, and slow, but they can’t provide the real-time information insurers need to make the best decisions possible. Instead, insurers need modern insurance technology, which now includes powerful automation, data analytics, AI-driven insights that enable insurers to assess risk, develop the best pricing and rating strategies, and personalize offers.

With modern insurance technology, today’s carriers will find themselves in the best position to continue to generate higher revenues from 2024 rate increases, yet do so in a way to retain their most valuable customers. 

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