LAHAINA, HAWAII–While insurers weathered last year's catastrophe losses and defied pundit warnings of a possible hard market, the chief executive of the Insurance Services Office cautioned that population growth and soaring home values in vulnerable areas are boosting carrier exposures to potentially dangerous levels.
The ability of the industry to withstand record losses from last year's hurricanes was "a testament to their strong capitalization prior to last year's storms and their risk management," along with the industry's sharing of risk globally, said Frank J. Coyne, chairman, president and CEO of the Jersey City-based ISO.
While last year's hurricanes amounted to $58 billion in losses, insurers will ultimately be responsible for between $31 billion and $36 billion after reinsurance recoverables, Mr. Coyne noted here during the 80th annual meeting of the American Association of Managing General Agents.
Insurers had $25 billion in residential and commercial property losses in Louisiana alone–$3 billion more than all the premiums property insurers charged in the state during the 23 years from 1982 through 2004, according to Mr. Coyne.
Despite these losses, which prompted some analysts to anticipate a hardening market–not just in property-catastrophe lines, but across the board–markets generally remain soft, stifling industry premium growth.
One reason for this, he said, is that insurers improved their underwriting and as a result saw the industry's combined ratio improve from 116 in 2001 to 98 in 2004. With last year's disaster losses, the industry combined ratio rose to 100.9–but if adjusted for abnormal catastrophe losses, the ratio would stand at 95.1, he noted.
Improvement in investment income is also fueling a softening market, he said. Aside from 9/11 losses, the hard market of 2001 was brought on by a drop in investment income to $37.2 billion by 2002. However, by 2005, that total improved to $49.5 billion–more than offsetting the industry's insured losses last year, he said.
That does not mean all insurers will prosper, he added.
Indeed, he pointed out that return on surplus has averaged less than 6 percent since 2001. Competition is heating up, prompting consolidation, he said–noting that since 1990, the number of domiciled insurers has dropped 25-to-30 percent.
"All signs indicate further consolidation as stronger insurers continue to drive weaker insurers from the field, or swallow them up," he observed.
Technology improvements are also fueling the softening market, said Mr. Coyne, allowing insurers to develop data and programs to underwrite lines more efficiently. Using advanced data technology, insurers today can underwrite "using scalpels instead of meat cleavers when addressing risk," he said.
However, Mr. Coyne cited a growing chasm between those who use technology to target business and those who are not as sophisticated, affecting the future viability of some insurers.
Hurricane exposures remain the greatest threat to insurers with huge coastal exposures, he said. But while there continues to be concern over the increasing frequency of monster hurricanes, a major man-made problem is the growing exposure along the coasts and the surge in construction prices, according to Mr. Coyne.
He pointed out that in 1916 and 1933, the number of hurricanes making landfall were just as bad as in 2005. However, he continued, if the six hurricanes that struck the United States in 1926 were to hit the exact same locations today, insured losses would exceed 2005′s totals on a real-dollar basis due to increased concentration of properties of higher value in vulnerable areas.
According to figures from ISO's subsidiary modeling service, AIR Worldwide, which Mr. Coyne used as part of his presentation, a duplication of 1926 events would cause $65.8 billion in insured losses today. Hurricane Katrina, the worst U.S. insurance loss, would fall to third on the top-10 list.
"The inescapable conclusion is that the effects of exposure growth far outweigh any effects of global warming" as well as ocean warming on frequency of storms, he said.
While insurers are in a strong position to be profitable in 2006, there is no guarantee that another weather event similar to 2005 would not have a worse impact on the industry's bottom line–particularly since reinsurance is not as widely available to back up U.S. primary carriers, he noted.
On another catastrophe issue, Mr. Coyne said terrorism is not a risk that private insurers can bear alone. One AIR estimate, he said, put an insured loss from a terrorist attack using a weapon of mass destruction at $750 billion. He called on insurance agents to use their clout to advocate a public-private solution to cover this exposure.
In response to a question regarding the investment of capital into the insurance market, he said those investors who put capital in expecting to reap the benefits of anticipated price hikes, could pull that capital if they don't see the returns they expect in a softening market.
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