Fitch Lists Insurers' Hurricane Problems

The insurance industry faces meteorological as well as legal and public relations challenges from the hurricane season, which starts today, Fitch Ratings Inc. said.

Hurricane forecasting organizations are predicting an above-average storm season, which may once again yield very disproportionate conclusions for insurers depending on how severe the storm season is, according to Fitch Senior Director Don Thorpe.

"Primary insurers will incur more losses relative to reinsurers if this hurricane season is one of several small to moderate storms, while reinsurers will likely bear the brunt of financial losses if this season is one of large to very large events," said Mr. Thorpe.

With reinsurance pricing peaking last year and primary insurance pricing in high hurricane exposure areas remaining relatively strong, Mr. Thorpe said he expects a subtle shift toward relatively more quota share reinsurance in 2007, which may increase the reinsurers' exposure to multiple storms.

The insurance industry is also mired in a regulatory storm that is every bit as threatening to its financial strength as its meteorological counterparts, Mr. Thorpe said.

The most contentious claims from Hurricane Katrina have begun to work their way through the court system, according to Mr. Thorpe.

"Although both sides in the wind versus water debate can claim victories and defeats, a significant number of so-called slab cases (where the entire home was ripped off the foundation) are now being reexamined," he said.

This may place some insurers' 2007 earnings under added pressure if those insurers did not set up adequate reserves for those claims, he said.

Insurers also appear to be losing the public relations battle over Hurricane Katrina claims settlements, Mr. Thorpe observed, and subsequent coastal area price increases, which may also affect them financially.

"An insurer's financial strength is derived from its ability to generate earnings over a sustained period of time, and if insurers are not able to convince regulators of the value of their products, then pricing is unlikely to achieve the levels needed to sustain high financial strength ratings," said Mr. Thorpe.