How can insurance co's get away with jacking up premiums everywhere due to terrorism?

Even in the medum sized town on the Eastern Shore of Maryland where I live, business insurance premiums for insuring commercial real estate against fire or other physical damage have increased quite substantially after 9-11 and have not deflated yet, and the reason given by agents is usually some muttering about how coping with post 9-11 risks has affected policies even in lower risk areas.

Now, I can understand if my building in DC or New York or some large urban area has the premiums go up, but why across the board? Theoretically capitalism is supposed to prevent stuff like stuff like this from happening because some bright actuarial spark at a insurance comapny on the grow should say.

“Hmm… y’know - common sensically and actuarially the risks of Astro’s Elevator Company on the Eastern Shore of MD being targeted by Al-Queda is low enough that I will become a preferred insurance provider by keeping my costs lower than the competition to garner new business.”

But this is not happening. Costs are up across the board and companies seem dis-inclined to negotiate premiums. Why are insurance companies not adjusting premiums to match real world risks to get new business? How can insurance companies get away with this in a nominally competitive capitalist economy?

a) it is more important for an insurance company never to lose money than anything else;

b) nobody has any idea of the actual risk presented by terrorism;

c) insurance companies have been losing money for a long time (both because of catastrophic events and the fact that they had a lot of income invested in tech stocks);

d) see a.

Insurance pricing, like most other pricing, follows supply and demand. In this case, “supply” is the available capital to write insurance policies. The costs of the 9-11 attacks and the increased reserves necessary to cover other attacks which are seen by underwriters as more probable in the new environment have vastly decreased the total amount of capital available to insure risks.

Since the price increases, more capital has come into the market, and some areas are seeing at least a moderating of price increases. But the total available is still less than it was on 9-10. As Exapno Mapcase said, property and casaulty insurance hasn’t been profitable for a while (basically, since the stock market stopped making up for unprofitable underwriting), and the industry was overcapitalized – insurance was too cheap to reflect the real risks of writing it.

I think Mapcase has it, essentially. Many insurance companies have been losing money, both because of bad investments (got caught up in the dot.com hysteria just like everyone else), because of gigantic liability awards, and (this for Lloyd’s) “long tail” policies in which people get lung mesothelioma 20 years after some exposure to asbestos and sue then. Then along came 9/11 and it was the excuse the companies were waiting for to raise rates. They will not come down, until and unless there is some way of capping liability awards.

A friend of mine has a city house and a country house (a log cabin, actually, but with electricity, central heat, telephone, etc., not exactly what Honest Abe grew up in). He has a burglar system hooked up to the phone and is about 20 feet from a lake. Well, halfway through the policy year, his insurance company suddenly announced that they were raising the premium from $400 to $3000 and please send the extra money immediately or have the policy cancelled. A called to the agent elicited the information that they had sent an inspector (it is virtually impossible to find without detailed instructions) who claimed that there is no fire hydrant nearby (true, but there is that lake) and no burglar alarm (totally false and like most people who use alarms, the alarm is prominently marked). His reaction was to immediately cancel all his insurance with them, his car, his main house and this. he was able to do this as he pays monthly and he went out and found a more reasonable company right away. He also sent them a letter threatening to sue, although it is not clear to me for what.