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AUTO INSURANCE INDUSTRY Investments pay off So why raise premiums? YOU may have noticed that auto insurance premiums have gone up. By Larry Haverkamp (Doc Money) [email protected] 24 June 2008 YOU may have noticed that auto insurance premiums have gone up. The industry said it suffered underwriting losses last year so insurers had no choice but to increase premiums. What they didn't say is that when you consider the money they made from investing our premiums, they made profits and not losses. I'll tell you how. The General Insurance Association (GIA) represents the auto insurance companies. Its President, Derek Teo, said at a press briefing: 'For every dollar in premiums that we collected in the last two years, we paid out $1.20 in claims and other expenses. The current loss situation is not sustainable.' At the GIA annual meeting on March 26, he told auto insurers they must 'collectively address the ... premium inadequacy to turn around the results soon.....' If that was a call to raise premiums, it succeeded. Auto insurers increased premiums by up to 30 per cent. The average was just over 8 per cent as of March 31, exceeding the rate of inflation. Industry sources tell me it has gone higher since then. The press picked up the banner. On March 27, Straits Times reported, '...motor insurance losses which hit a 5-year high of $103.2 million last year'. The same day, Business Times said: 'Last year, insurers reported a loss of $103.2m of motor insurance....' To the casual reader, it looks like auto insurers lost $103.2m. That is wrong. They actually made money. It's because the $103.2m in losses are from one part of the business, the underwriting part. It is money the insurer makes if you don't have a car accident. Then it doesn't have to pay any claims and can keep your premiums. That becomes its underwriting profit. The second part of the business is investing your premiums. It is even more important since it earns more money. INVESTING MORE PROFITABLE That part of the business has been so profitable that it more than offsets the losses from underwriting. Take the top 10 auto insurers. Annual returns show they account for 85 per cent of the business, and in 2007 earned a whopping $143.5m from investments. It more than offset the $104.5m in underwriting losses. On net, they earned $39m in profits. Suppose we look at all 35 auto insurers. It shows the same picture: $183m in investment income which more than offset underwriting losses of $129m. The difference is net profits of $54m. The highly publicised losses are only one part of their business. Looking at the entire picture shows auto insurers made hefty profits in 2007. It was almost the same in 2006. The top 10 auto insurers earned profits of $137m. But only $5m of it came from underwriting while $132m came from investments. It is the nature of the business. Investments produce more profits for auto insurers than underwriting.