Now it's the Insurance Companies

It's all so predictable. In the interests of marital harmony, I have avoided saying "I told you so," but my tongue is getting sore from being bitten all the time.

If you're a Californian, you're probably headed for double incentives to sell off your excess cars. The car tax is going up, and it's a darn good bet that your car insurance is going up, too. Because there's a natural cycle in the insurance industry, and most people don't realize that it rises and falls on the stock market.

The basic model for insurers is to sell insurance at just about what they expect to pay out (spread over many, many insurance customers) so that the insurance side of the business is barely profitable. But they don't pay out every dollar in the year they get it - so they invest their cash reserves and make their money on the investment profits. In a sense, the investments have been subsidizing our "cheap" premiums during all these high-growth years.

When investment markets are booming, insurance companies lower their rates to attract more customers - to attract more investment capital. Eventually, the boom fades, the investment returns slow or even reverse, and the insurance companies then scramble to layoff employees, cut costs, and raise premiums to at least cover costs. Trouble is, right when insurance companies start losing out on investment returns, their claims start increasing. People who would work through the pain in good times, take disability when jobs are scarce. People "accidentally" leave an unattended candle in the house that won't sell, they "lose" valuables and they "break" insured stuff (like cars with hefty loan payments). People make stupid mistakes when they're stressed out about the economy, and people do desperate things when the economic problems hit too close to home. Theft increases, vandalism increases, worker comp fraud increases, and the insurance companies start feeling like even their mothers only call because they need something.

Compounding the natural cycles in the insurance industry, this year we've got once-in-a-lifetime investment losses and a sudden contraction in the number of individuals (families and businesses) that can carry the necessary rate increases. When you get three generations living in one house, they're only paying one homeowners' insurance policy. A lot of people in financial distress discover that they don't need a second car, maybe not even a first car. And businesses that go out of business drop all of their insurance policies - general liability, workers' comp, key-man life insurance, business continuation insurance, et. al.

Girl Scouts aren't the only ones passing their cost increases on to the consumer.