To understand, we need to look at how insurance companies work. They charge most policy holders with a vehicle or a home a monthly premium. This brings in a small mountain of cash every month. That money is invested until its needed to pay out on claims. Some goes into fixed-income products. The rest goes into shares. As you may have noticed, the Dow and other stock exchange indexes have been in free-fall. The result is that State Farm has lost the capital value of the investments and, in many cases, no longer receives any income as interest or dividends. This might have been manageable except for this little thing called global warming that no-one believes causes hurricanes and other weather catastrophes. The last two years have seen an big increase in weather-damage claims. Put the loss of investment income and the unexpected rise in claims together and you turn a $5.46 billion profit in 2007 into a loss in 2008.
Should this make you worry? Well, look at it this way. The insurance industry is suddenly making a loss. Shareholders in general and the policy holders in State Farm are not happy. Senior officers of the companies want their bonuses. The for-profit companies are tempted to raise the premiums across the board to get their earnings back into profit. Except with a recession threatening to turn into a depression, thats not going to work. Make the policies unaffordable and people stop buying. Thats why State Farms just dropped its auto insurance rates in Georgia by an average of 1.5%. For the record, this means the current premiums are 12% lower than five years ago. Since State Farms insures around one quarter of all vehicles on Georgias roads, this is a good deal. So the next time youre shopping round for a cheap car insurance policy, you may be pleasantly surprised that the premium rates from an increasing number of insurers have fallen in other states. The next bill may not be quite as painful as you fear.