So the stock market is like a roller coaster and we’re somewhere near the bottom of that big first drop. And just like the stomach in your cerebellum feeling you get as your wallet and change fly out of your pockets you want to vomit every time you look at your 401(k) statement.  Well at least the stock market’s bad performance doesn’t spill over into other parts of your life where unemployment, foreclosures, and dwindling savings provide the stability you need to get by.  Or does it?

You knew I was going there of course.  If the headline wasn’t a giveaway then the set-up sure was.  For those of you that have been around long enough to remember my post on how insurance companies make money, you won’t need the quick review.  In short, insurance companies (of all kinds) collect premiums from their customers.  These premiums are invested in things like bonds and stocks (and mortgages but we don’t need to go there).

Well things like car accidents, home fires, dying, and broken arms don’t really care too much about what the stock market is doing.  So when insurance companies suffer from bad investment performance they’re earnings get killed.  Don’t worry about them though, they can just raise premiums.  Here’s a simple illustration of how this will work.  I’ll use a made up insurance company for it.

The State Health Insurance Trust (their logo is a bull, you know because it represents strength) collects $100 annual premiums from 10 people, giving them $1,000.  This money is invested gets a 10% return, so the company now has $1,000.  Say the total cost of healthcare for the 10 customers that year is $900.  This leaves the insurance company with $200 in profits.  The next year, the State Health Insurance Trust collects another $1,000 but the market does down 10%.  So the insurance company is left with only $900 to cover health expenses.  Well health care costs went up to $950 and so the company had a negative $50 profit, or a $50 loss.  The insurance company can make up for this loss next year by charging their customers 10% more.  Now they collect $1,100 in premiums.  This covers their expected health care costs and hopefully their investments will perform better.

Remember that is an extremely simplified explanation.  However you can see why the insurance company needs to raise premiums to stay afloat.  The fairness of this method isn’t being debated here (we’ll do that another day).

What kind of increases are we looking at in 2009?  According to a USA Today story the expectation is a 4% increase on car insurance after a 3% increase last year and homeowner’s insurance going up another 3%. Figures weren’t provided, but term life insurance is also expected to increase.  I can’t complain about that too much because the prices on those policies has been dirt cheap for years.

Can we do anything to counteract these increases?
You mean besides pray for better investment performance this year?  On a global scale, no.  On a personal scale, yes.  This isn’t the kind of blog that bothers you much with cost saving tips on all that jazz, but you can Google search for tips.  I’ll also crowd source this and allow readers to put their favorite sources for money saving tips in the comments.

Photo: qifei

categories: business, investing