Insurance leaders were of two minds when it came to catastrophes at the industry's recent annual "family reunion"—citing grave concerns about the massive losses they endured and the impact on their 2011 bottom lines, while at the same time looking back with pride on how well they performed during the worst of times for their policyholders.
Cat losses were a prime topic for discussion among the CEOs and association leaders on hand for the Property/Casualty Insurance Joint Industry Forum, both during the two formal panels and the networking breaks as well.
First and foremost, insurers were justifiably pleased they were able to so efficiently handle the wide array of disaster losses across the country last year, including tornadoes, hurricanes, snowstorms, flooding and wildfires. In particular, the industry's response to the devastating tornado that hit Joplin, Mo. in late May was cited. Insurer cat-recovery teams were on the scene in Joplin within hours after the deadliest tornado in decades, which resulted in 158 fatalities and more than $2 billion in insured damages.
Recollections like these once again prompted laments about what a shame it is that the media spotlight usually shines on the industry when insurers come up short on a relatively small percentage of claims in any given disaster, while there are rarely news reports about how insurers save families, businesses and entire communities following a catastrophe.
You could say that paying claims is table stakes for insurers, and that congratulating them for doing what people paid premiums for is unnecessary.
But I believe one of the prime reasons most "civilians" (those outside of the business) often don't trust insurers or think highly of the profession is that they only hear about the industry when there is a screw-up. If there were more stories about insurers coming to the rescue of people financially, perhaps the industry would be a more attractive career choice and be better appreciated by the public at large (as well as by their political representatives).
In any case, another positive takeaway from last year's terrible disaster losses is that the industry was able to absorb the blows and remain in excellent financial shape. Through the first nine months of 2011, U.S. insured-catastrophe losses totaled $32.6 billion—nearly double the average in cat claims for that time frame historically, according to figures compiled by the Insurance Services Office Inc.
The full-year figure will be even worse, thanks to the freakish pre-Halloween snowstorm that hammered the Northeast. Indeed, total cat losses for the year could top $35 billion.
Despite these massive losses, the industry's "piggybank" (policyholder surplus) only shrunk by 4 percent, demonstrating how well-capitalized the business is these days. (Indeed, many would say overcapitalized, which has fueled the soft market up until recent times—although attendees at the Forum agreed that premium volume will likely rise and profitability for both commercial and personal lines would improve in 2012.)
However, there were serious concerns expressed about what the industry will face going forward in terms of disaster losses. It's easy to dismiss the severe rise in claims as an anomaly, but a number of those at the Forum are worried that this could be the "new normal." The U.S. experienced a terrible cat loss year in 2011 even without a major hurricane hitting Florida or the Gulf Coast. And as bad as disaster claims were domestically, they were even worse outside the United States.
A number of executives in attendance complained that many risks remain underpriced despite a recent uptick in rates. In addition, even without "abnormal" cat losses, the industry's underwriting performance deteriorated, indicating that insurers have bigger, more fundamental issues to address.
One major concern voiced by a number of players at the Forum is the heightened risk of a global supply-chain disruption. The worldwide impact of the earthquake and tsunami in Japan is just one example of how a disaster in one area can impact businesses (and prompt insurance claims) both near and far. Globalization has changed the risk profile of major businesses and entire industries—and insurance is only a partial solution.
This is a challenge that cries out for enterprise risk management, yet some attendees at the Forum said they've seen clients cutting back on their risk-management and loss-control budgets during tough economic times. The potential impact of such short-sighted retrenchment may have been muted by the fact that operations were scaled back in the recession, but as the economy recovers, will businesses restore their depleted risk-management departments, or try to get by even as potential exposures mount? If it's the latter, insurance claims would likely rise.
In the meantime, insurers at the Forum talked about the need to improve their data analytic capabilities, particularly when it comes to aggregation of exposures. Some observed there is lots of data on low-frequency, high-severity events, but not enough attention being paid to high-frequency, low-severity losses that can add up.
Unfortunately, insurers have no crystal balls to predict with absolute certainty when and where catastrophes will hit, or how severe they will be. But predictive modeling is the next best thing.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.