Lexington, KY - A grease fire in a diner in Paris shuts down a mom-and-pop restaurant, depriving the owners of their income and employees of their paychecks. Insurance covers the loss, and soon the owners put up a "Grand Re-Opening" sign. A middle-aged father of three from Nicholasville suddenly drops dead of a heart attack. His wife and children are grief-stricken, but a $250,000 life insurance policy he purchased two years earlier will help the family weather an uncertain financial future. A saleswoman is sideswiped while driving on Man O' War in Lexington and her car is totaled. She depends on the vehicle for her livelihood. Lucky for her, the vehicle insurance will help replace the SUV and pay for the treatment she received for her minor injuries.
Scenarios like these play out every day across Kentucky and demonstrate the important role the insurance industry plays in protecting Kentucky's economy. "There is insurance out there for any kind of risk. We try to make businesses aware of business interruption insurance, which could have been very helpful in Western Kentucky during the ice storms last winter or for businesses in Jefferson County during the flooding last summer," said Sharon Clark, commissioner of the Kentucky Department of Insurance. "We want it to be there when people need it."
In 2008, Kentucky policy holders had about $16.5 billion in insurance in force, according to the Department of Insurance. Nearly all coverage falls into three categories: life/health ($6.7 billion), property/casualty ($5.5 billion) and health ($4.0 billion). Kentucky incurred about $3.3 billion in losses in 2007. "Kentucky has experienced what insurance companies can do," said Bill Rea, who has operated a State Farm Insurance agency in Lexington for 39 years. "With the hail storms around Lexington in 2007 and the ice storm and wind damage in Western Kentucky and elsewhere earlier in 2009, insurance companies stepped up to provide for those who were properly insured. They received accommodations or had their structures and contents replaced. Without that protection, people would not have gotten whole," said Rea. Clark agrees. "The ice storm was a huge loss for Kentucky, but that's the purpose behind insurance companies."
Kentucky's insurance companies include so-called "domestic" insurers, or those that incorporated here, and another 1,504 "foreign" insurers, or companies that do business in Kentucky but are based in other states. The National Association of Insurance Commissioners ranks Kentucky 28th in the nation in premium volume. California is number one with about $220 billion.
Industries that directly benefit financially from the insurance industry are auto parts and repair companies; building construction and supply firms; health care providers; furniture, appliance and home improvement stores; and the legal profession, to name a few. The Kentucky Department of Insurance also contributes to the economy when its budget of nearly $40 million is spent across the commonwealth. The department employs about 125 people. "Insurance has an impact that's not really visible. We take it for granted," said Rea.
Economically speaking, Kentucky's insurance industry represents a gross state product of about $2.75 billion. The industry is a major contributor to the economy by providing jobs (nearly 39,000 statewide) and tax revenue ($209 million in fiscal year 2008). The insurance industry also provides revenue to Kentucky cities and towns through the local government municipal premium tax. You may not like paying it, but the law allows communities to collect an extra tax on your policy. "Last year, that represented about $300 million to those local municipalities," said Commissioner Clark.
Over the last decade and a half, the insurance industry has become national news. Stories about hurricanes and other natural disasters were absorbed by savvy consumers who now demand better coverage, more options and cheaper rates in their own plans. However, rates are climbing in Kentucky. Blame it on all the bad weather.
"We are starting to see higher rate filings for casualty insurance, and that is not unexpected, considering the amount of the losses from storm damage in Kentucky over the past 18 to 24 months," said Clark. "That usually trails behind nine months to a year before we see those rate increases, but they're beginning to come," added Clark, who also believes that the states, not the federal government, should regulate the insurance industry.
Another issue facing Kentucky's insurance industry is the economic downturn. Private U.S. property/casualty insurers' net income after taxes fell 59.3 percent to $5.8 billion in the first half of 2009, from $14.1 billion in first-half 2008, according to the Insurance Information Institute. Insurers' overall profitability dropped to 2.5 percent in the first half of this year, from 5.5 percent in first half of 2008. Even the most conservative corporate portfolios felt the sting, including those owned by the insurance industry.
But the troubled economy has not lessened the overall importance of the insurance industry to Kentucky's economy. "Many never know how valuable insurance is," Rea said, "until there's a catastrophe or financial setback and a person can't reach into their own pocket to make themselves whole again."