As we began to investigate in the first installment of this series, insurance is an everyday need of most consumers in developed countries. With a huge market, insurance providers are an integral part of the U.S. economy and provide a way for consumers to hand off heavy financial risks in exchange for premiums. Now let's take a look at one of the key divisions of insurance: property and casualty coverage.
What is it, exactly?
The best example of this is automotive insurance: Though you may have property insurance included in your policy to cover the costs of damage to your vehicle, the policy's casualty features are there to provide coverage should you be "at fault" for an accident. The terms of your casualty insurance within the auto policy would cover the damage to the other person's car, medical expenses, and other features that you may choose. The mandate on auto insurance within the U.S. is really focused on the casualty portion of your policy, since you may not choose to include property coverage if your vehicle is not worth much.
Of course, property and casualty insurance should be familiar to anyone who owns a home, a car, or a business -- though there are some important characteristics to point out. As the title would suggest, property insurance is a way for you to protect your physical property. This includes damage to your home, your car, or your belongings. Casualty insurance goes hand in hand with property insurance, but it distinguishes itself by covering any liability you might have to another person.
Premiums
As mentioned in the initial article in this series, consumers pay insurance companies a premium in exchange for coverage of future events. Most insurers report premiums in two ways: written versus earned. Premiums written should be viewed as the insurer's current sales of new policies. This is their income from new customers or new renewals. Earned premiums are from policies that are already in force and have not had a claim filed against them. For example, if you have signed a policy for $1,000 in coverage for a single year and have not filed a claim during the first six months of that policy's time frame, the insurer will report that they have earned $500 in premiums.
Losses
Of course, we all have insurance in case we experience a loss. For insurers, paying out claims is part of the business and an important part of their financial reporting. Each quarter, insurers will report their loss ratio, which allows investors to see how much they are paying out in claims/losses. The ratio is measured per $100 in premiums, so if an insurer reports a loss ratio of 65, that means that for every $100, it is paying out $65 in claims. Taking the loss ratio a step further is the combined ratio, which will add components like acquisitions and other costs for an overall view of the company's payouts per $100 in premiums.
Because this division of any insurer's operations is particularly sensitive to natural disasters, losses can spur changes to policy rates. Though it's illegal for any insurer to charge higher premiums in order to recoup losses from one disaster, a multitude of events can create the need to raise rates in anticipation of future events. We are seeing this in the current market following Hurricane Irene, Hurricane Lee, and Hurricane Sandy. The increasing rates have helped insurers improve their revenue generation and ward off any cause of concern that catastrophic losses will exceed premiums.
The players
Every year, the National Association of Insurance Commissioners releases data on the top 25 insurance providers in the P&C market. In the table below, you'll see some recognizable names and their market share ranks in the various coverage subdivisions of P&C insurance.
| Insurance Company | All Lines | Personal Auto | Com-mercial Auto | Home-owners | Medical Liability | Workers Compen-sation | Other Liability |
|---|---|---|---|---|---|---|---|
| AIG (AIG -0.45%) | 5 | N/A | 6 | 13 | 6 | 4 | 1 |
| Allstate (ALL 0.04%) | 4 | 2 | 19 | 2 | N/A | N/A | N/A |
| Berkshire Hathaway (BRK.B -0.26%) | 7 | 3 | 23 | N/A | 1 | 7 | 21 |
| Progressive (PGR -1.00%) | 9 | 4 | 2 | N/A | N/A | N/A | N/A |
| State Farm | 1 | 1 | 12 | 1 | N/A | N/A | 15 |
| Travelers (TRV 0.26%) | 6 | 9 | 1 | 6 | N/A | 2 | 2 |
Source: 2012 NAIC top 25 property and casualty companies.
One of the most competitive product lines for insurers is the personal auto policy. As you can see in the table above, AIG doesn't even compete in that space, while the others jostle for more market share. Berkshire Hathaway's Geico division has had one of the most impressive runs at higher market share, growing from 5 million policies in 2002 to more than 12 million in 2012. And with their new use-based insurance offerings, both Allstate and Progressive are finding new ways to make strides in the challenging market space.
Property's covered
Now that we've gotten a solid grasp on property and casualty coverage, the next edition of this series on insurance will cover a more complex division for insurers: life and health. As we work our way through the insurance industry's operations, you'll get a better understanding of the major players' business models and how to evaluate whether they're a good fit for your portfolio.
