With June not yet over, this year is already guaranteed to be the costliest for U.S. insurers since 2008 due to the onslaught of inland catastrophes this spring.

As a result of all this claims activity, homeowners’ insurers are looking to increase rates to better match the risk. 

The losses have affected “a large share of the homeowners’ market over a large geographic area, but interior states most,” says Robert Hartwig, president of the Insurance Information Institute. 

“Insurers will have to imbed the trend of this upward [claims] escalation in their cost structures,” Hartwig adds, with rates for homeowners’ insurance especially likely to increase in the Midwest, Plains and Southeast.

DAYS OF THUNDER

Catastrophe losses for the first half of the year are about $17 billion, Hartwig estimates. Primary insurers, not reinsurers, will swallow most of these losses, according to Fitch Ratings.

In comparison, insured losses were about $27 billion in all of 2008—a year that included Hurricane Ike.

“So we’re a long way from that [figure],” Hartwig says—pausing a moment and then pointing out that the 2011 Atlantic hurricane season began only on June 1. 

“We could be just one Category 2 hurricane away from 2008 levels,” he says.

Even without a hurricane landfall, Hartwig says property and casualty insurers face the “continuation of a trend” that has developed since 2008: damaging and deadly thunderstorms—and lots of them.

 With insured losses of about $30 billion, 2008 through 2010 was already the industry’s costliest for thunderstorm damage (including tornadoes, hail and high winds).

Then 2011 brought some of history’s most brutal tornadoes—in terms of both property and human life—to multiple states from Alabama to North Carolina to Missouri in April and May. 

Catastrophe-risk modeler AIR Worldwide puts industry insured losses in the range of $4 billion to $7 for thunderstorms May 20-27. AIR and modelers EQECAT and Risk Management Solutions say a late April round of tornadoes caused between $2 billion and $6 billion in losses.

“One year doesn’t make a trend, but this has now been several years,” Hartwig observes. “Insurers for some time have recognized that rates in many interior states did not match the risk. Now the frequency and severity trends here have to be included in the rate-making process.”

Fitch, writing in a recent report, concurs, saying insurers “have underestimated the frequency and loss severity of inland catastrophe events.”

 

RATES RISING

Insurers have been starting to respond.

In the same report referenced above, Fitch says homeowners’ insurers are increasing rates in many markets. Premium volume in 2010 for homeowners’ insurance, in fact, grew at a faster rate than other P&C insurance segments.

But “faster” is a relative term in this soft market. The average homeowners’ premium stood at $807 in 2010, up just a small increment from the $791 average in 2008—which itself was 3.9 percent below the 2007 figure. 

But even with the small increase last year, the homeowners’ line still posted a 106 combined ratio during the year—a ratio that could worsen with this year’s catastrophes.

According to Fitch (using numbers compiled from Highline Data), among the top 10 states with the highest five-year average-loss ratio in the homeowners’ line, only Georgia (third, with more than 90 percent) is traditionally considered a catastrophe-prone state. Oklahoma (about 105 percent) and Minnesota (nearly 100 percent) top the list, which also includes Arkansas, Indiana, Kentucky, Ohio, Tennessee, Missouri and Montana. 

COMPANY BY COMPANY

Some of the largest providers of homeowners’ insurance have reported major losses from storm activity in April and May. State Farm says it has paid out $1.75 billion on claims from the storms. 

Allstate says catastrophe losses from April and May could reach $2 billion. At a conference earlier this month, Allstate told investors the company was raising homeowners’ rates because returns have been inadequate in the segment.

The Travelers Cos. says it expects after-tax catastrophe losses of about $1 billion for the two-month span of spring storms. 

Liberty Mutual says it spent hundreds of millions to pay claims in April, while Nationwide says the losses it suffered will challenge second-quarter income. And claims from April and May are expected to be between $250 million to $310 million for Chubb, the company says.

Large catastrophe losses are not limited to the nation’s top homeowners’ insurance writers. Insurers such as State Auto, National Security Group, Alfa and United Fire & Casualty have all reported catastrophe loss well-beyond the norm. 

For instance, United Fire says its full-year catastrophe losses average about $25 million. The company expects second-quarter catastrophe losses of between $30 million and $35 million.

Alfa says it’s dropping more than 70,000 policies in its home state of Alabama after severe tornadoes there at the end April forced the company to take another look at its property portfolio. The tornado event is Alfa’s costliest ever.

BENT, BUT NOT BROKEN

Despite the losses and disturbing loss trends, insurers’ claims paying capacity is “stronger than ever,” says Hartwig. Surplus is at record levels, and the the industry will have “no difficulty” paying claims from April and May storms.

The catastrophic events in 2011 are an “earnings event for insurers, not a capital event,” adds Hartwig. 

The storms have demonstrated the “stability and readiness of the insurance industry,” adds Christopher Hackett, director of personal lines policy for the Property Casualty Insurers Association of America.

“The response to serve people during their greatest time of need was outstanding,” Hackett says. “This is why this industry is here, and we were able to show what we could do.”

Insurers, spread thin because of the wide geographic area affected by the storms, launched catastrophe-response vehicles, sent additional claims personal, cut checks for living expenses and started the claims process quicker than ever with the use of technology, Hackett adds. 

“Companies were tested, but I think they learned from past events and they really have proactive plans in place to respond to catastrophe situations with dedicated catastrophe-claims units,” Hackett says.