Property and Casualty 2005 results

The property and casualty insurance industry was headed towards record profits last year, only to have Katrina et al blow the black ink right off the books. The latest estimates indicate 2005 will actually result in a net loss for the industry as a whole. This will likely inspire a hardening of the market, as we have been predicting for several months.
The industry-wide combined ratio (losses plus expenses before investment income) should end up around 105% for 2005. While analysts expect 2006 to improve, I wouldn’t put much, if any, stock in their predictions – the vagaries and severity of natural disasters have made a mockery out of human predictive capabilities.
From a financial perspective, the industry’s hit in 2005 resulted in a Return on Equity (ROE) of 9.5%, hardly a stellar result but not too bad considering historically low interest rates and the up-and-down nature of the equity markets. On the bright side, the renewal of the Terrorism Risk Insurance Act (albeit in modified, and slimmed-down form) for two more years has added a lot of stability to what otherwise would have been a very nervous market.
What does this mean for you?
Pressure on underwriting results should mean a stronger focus on managing claims. Some of the recent initiatives by companies like Crawford indicate more and smarter approaches are in the offing. And that’s good news.


Sedgwick CMS acquired by Fidelity National

Sedgwick CMS, one of the leading claims administrators in the property and casualty industry, will be acquired by Fidelity National, the largest title insurance company in the country. This followed a several-month process wherein a number of entities were competing to purchase Sedgwick.
If you haven’t heard of Fidelity National (no. 261 on Fortune 500), here’s their PR blurb…
“(Fidelity is a) leading provider of core financial institution processing, mortgage loan processing and related information products and outsourcing services to financial institutions, mortgage lenders and real estate professionals. Through its wholly-owned subsidiaries, FNF is also a provider of specialty insurance products, including flood insurance, homeowners insurance and home warranty insurance…”
Looks like a complementary deal – Sedgwick does “outsourced” claims processing, albeit serving a different marketplace and different customers. In the announcement, FNF’s CEO said Segwick’s acquistion will enable FNF to “leverage our core expertise in title insurance processing and financial transaction processing…”
Perhaps FNF is thinking that their home-grown expertise in processing title insurance and other transactions can be helpful to Sedgwick, or Sedgwick can provide FNF with expertise that will streamline operations at their new parent.
Other than that, I don’t see any “synergies”.
Thanks to an anonymous reader for the heads-up.


Greenberg will not be charged with crime

Hank Greenberg, ex Chairman of AIG, has escaped criminal charges at least for now. A spokesman for Eliott Spitzer, NY Attorney General, announced that while civil charges may be pending, no criminal charges will be filed by the state.
However, Mr, Greenberg is not yet out of the woods. According to Insurance Journal, there are two federal investigations still in process, with the potential for federal charge. And, Spitzer is likely to add charges to his civil complaint in the near future.
Spitzer’s and other state attorneys’ probes of the insurance industry has already resulted in criminal charges filed against over a dozen individuals, hundreds of millions in fines and settlements, and a dramatic reshaping of several venerable firms including Marsh and AIG.
What does this mean for you?
Even though we didn’t need any more proof, more evidence that crime, or the appearance of crime, does not pay.


Property Casualty insurance rates

The latest information from MarketScout indicates the property casualty insurance market remains soft, with prices continuing to fall in October. This comes as somewhat of a surprise as industry analysts predicted a hardening (price increases) of the market after the disastrous hurricane season.
According to Insurance Journal;
“In October 2005, the composite rate for all lines of property and casualty coverage was down 4%, a slight market correction from the preceding month but still a noticeable composite premium reduction from the 2% increase in October 2004. The total market differential for the last 12 months has been 8%, with a gradual market softening from rate increases of 2% in October 2004 to a rate decrease of 6% in August 2005.
After Hurricanes Rita, Katrina and Wilma hit the U.S. mainland, the market began a measured correcting pace as premium reductions have subsided, particularly in property business. The market appears to be headed towards an overall rate increase sometime in the summer of 2006.”
There are likely two main factors delaying the impact of the hurricanes on premiums and coverage. First, many renewals had already been negotiated and agreed upon, therefore the rates were set before the storms hit. Second, primary insurance rates are driven in part by reinsurance rates, coverage limitations, and treaty arrangements. Most of the primary insurer – reinsurer contracts have yet to be renegotiated; when they are you can rest assured reinsurance rates will increase substantially, driving up the cost of insurance to the consumer.
Of interest to many readers, workers comp rates were down 6% year over year in October. However, these rate decreases were driven in large part by significant reforms in California and Florida; rates in most other states did not drop nearly as much as those two bellwether jurisdictions. Of note, workers compensation rates in California have dropped 26.7% since imposition of the reforms at the beginning of this year.
What does this mean for you?
Renew now while you can, before the impact is felt by renewed reinsurance arrangements. As it is, if you have yet to sign a deal, it is very likely too late.


Hurricanes hit insurer’s financials

The first indication of the financial impact of Rita and Katrina is St Paul/Travelers’ announcement that they took a $1 billion charge (after tax) to account for the costs of the two storms in the most recent quarter.
Interestingly, gross premium income was only up 2% from the prior year’s quarter. This is yet more evidence of the current soft market in property and casualty insurance. As noted here previously, rates are already heading back up as insurers seek to rebuild reserves after taking hits for the current storm season. Which is not yet over…
Return on equity was a strong 11.9% for the first nine months on an operating basis, even after including the hurricane impact. Without those storms, RoE would have been a very healthy 18.4%.
What does this mean for you?
As indicated here before, strong financial results usually mean prices will be coming down for insurance. However, the recent weather has likely hit confidence levels as well as financials. Thus, I would expect pricing to firm up rather than continue to soften.


Hurricane Wilma’s financial impact

Early indications are that hurricane Wilma will result in US insured losses of $6 to $9 billion. Although lower wind speeds and the faster movement of the storm contributed to these relatively modest claims (at least in comparison to Rita and Katrina), Florida’s strong building codes are also being credited with reducing the storm’s financial impact.
When a multibillion dollar storm is considered good news, the P&C markets are in trouble. And adding Wilma’s expected impact to that of the season’s previous storms makes this far and away the worst season on record in terms of financial damage. Wilma will likely cause additional damage as she moves up the coast, with strong winds and rain now hammering New England and the NYC area.
What does this mean for you?
Your insurance rates are going up.


Insurance rates up after Katrina

Insurance rates were trending down before Katrina, and risk managers who were lucky enough to lock in prices before the hurricane system got good coverage at lower prices. Those who did not renew before Katrina are getting hit with price increases as high as 20% for property insurance. The study examined employers with insurance renewals before and after the storm hit.
Rates were down for all property and casualty lines. According to Insurance Journal;


Katrina’s insured losses

Katrina’s impact on the insurance industry will be greater than first anticipated. With insured losses now estimated to be in the $30 billion to $60 billion range, this hurricane is the most expensive event in insurance history.
Losses are from wind, flood, and fire, and will certainly include property, business interruption, fire, flood, environmental liability and impairment, crime, life, and health. The latest estimates from Risk Management Solutions are for losses of $15 – $25 billion for the New Orleans flood alone, with the rest of the costs for other losses due to other causes.
The impact of Katrina will be felt in all lines of insurance around the globe. Because a substantial portion of the losses will be borne by reinsurers, excess premium rates will increase to help cover costs while availability will decrease. In turn, primary insurers will have to raise rates to cover their losses and the increased reinsurance premiums.
Fortunately, Katrina came at a time when overall property and casualty insurance rates have been decreasing. According to MarketScout, property insurance rates dropped 7% over the last year, while workers’ comp rates decreased 7%, inland marine 5%, and umbrella/excess 11%. Overall, P&C rates were down 6% over the prior year.
Predictions in the industry are for rates to stay level if not increase slightly. The good news for insurance buyers is the industry is quite healthy with solid profits and substantial increases in reserves over the last two years.
While the insurance industry is much maligned, events like Katrina clearly demonstrate the industry’s value to society. By spreading risk across a very wide customer base, the industry will be able to cover losses while continuing to provide coverage for those who desire insurance.
What does this mean for you?
As devastating as Katrina has been and will continue to be, the insurance industry has weathered this most devastating of storms, and will come through in fine shape. That is good news.


Katrina’s impact on insurance costs

Katrina will have a significant impact on the world insurance markets, and the impact will be felt quickly in the form of higher prices for many property and casualty insurance lines. Here’s how this works.
Insurers price their coverage based on statistical models that take into account the probability of claims occurring and the potential expense of those claims. In those years where few natural disasters occur, insurers do quite well. In bad years, they get hammered, either by one big event or a number of smaller events or, in the worst case, several big events.
Most primary insurers buy “excess” insurance from another firm, such as Lloyd’s of London. This excess, or re-insurance, allows the primary insurer to spread the risk, so catastrophic events such as Katrina don’t bankrupt them. However, Lloyd’s, General Re, Swiss Re, and the other reinsurers end up with significant exposure to this type of event.
Early reports indicate that Katrina’s devastation is not nearly as bad as it could have been. This is due to two factors – the storm did not directly hit New Orleans and its intensity was reduced appreciably before it made landfall. Damage to the refineries and platforms appears to be minimal, or at least less than expected. However, estimates are that Katrina will cost insurance companies between $9 and $16 billion. While the upper end of this range is higher than the most expensive hurricane in history, it is well under early predictions of $30 billion.
According to Forbes “The 2004 US hurricane season was the most destructive on record, causing insurance losses of 22.835 bln usd, according to the III.(Insurance Information Institute) The single most destructive hurricane to date is hurricane Andrew, one of only two Category Five hurricanes to hit the US mainland, which left insurers facing claims of 15.5 bln usd in 1992.
The changes in Katrina’s direction and intensity were good news for the insurance world, as most properties carry insurance that covers not only the cost of repairing them, but also the income lost when the facilities are out of operation, and any environmental damage resulting from their destruction.
Personal insurance lines losses will likely be quite high, especially in the property and auto lines. Business interruption and property are likely to take a substantial hit as well.
What does this mean for you?
Expect to see insurance prices spike. Reinsurers will have to cover their losses by charging more for excess coverage, driving up primary insurance costs. Primary insurers will have to not only increase prices to pay the higher reinsurance premiums, but to cover their losses as well.

This will be felt across all insurance lines, from workers compensation to homeowners to small business to directors and officers


2004 Property Casualty industry results

2004 was another banner year for property and casualty insurers as industry profits (investment income, underwriting, and all others) surged to $42 billion, a 28% increase over 2003 results. Industry capital and surplus increased by $55 billion, or over 11% from the previous year. And, underwriting profits were up $9 billion from 2003’s $2.9 billion loss as a result of the industry’s combined ratio (losses/claims plus administrative expenses) dropping to 98.9.
Certainly excellent results of which the industry can be justifiably proud. It is indeed a rare event for the industry as a whole to enjoy such stellar returns. That’s the good news. The bad news is these results have been a result of increased pricing over the last few years, and there are growing signs that prices are either level or declining for most lines of coverage.
As capital enters this market, and pressure grows on both stock and mutual companies to produce even better results, returns will decline as insurers compete for market share.
What does this mean for you?
If you are a risk, good days are back. If you are an insurer, maintain pricing discipline and keep your “cost of goods sold” under control by managing risk through loss prevention and medical management. Now is NOT the time to scrimp on the basics of insurance – risk selection, loss prevention, and claims management.