Insight, analysis & opinion from Joe Paduda
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;
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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 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 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.