April 10, 2006

Insurance Industry on Solid Financial Footing, But Overall Results Mask Problems in Certain Lines, Locations

NEW YORK – The property/casualty insurance industry will report an increase in its capital base and an overall profitable performance in 2005, enabling it to meet the insurance needs of the growing U.S. economy, according to preliminary financial results compiled by the Insurance Services Office (ISO) and the Property Casualty Insurers Association of America (PCI).  Insurers achieved these results despite catastrophe losses totaling a record $57.7 billion before reinsurance recoveries, according to ISO’s Property Claims Services unit.

“A financially strong, stable and secure insurance industry benefits consumers and communities devastated by disaster,” said Dr. Robert Hartwig, senior vice president and chief economist of the Insurance Information Institute (I.I.I.).  “U.S. insurers entered 2005 well capitalized and well prepared for major catastrophic losses, having implemented effective risk management strategies which helped insurers better manage losses and control costs.  Additionally, insurers’ investments benefited from higher interest rates and – like other American industries – a resurgent economy in 2005.  Last year’s financial performance is also a testament to the efficiency of the global market for sharing and spreading risk, principally through the use of reinsurance, which is insurance purchased by insurance companies.  That being said, the $43.2 billion earned by property/casualty insurers in 2005 translates into a 10.1 percent return on surplus or net worth, well below the 14.9 percent return on equity earned by the Fortune 500 group of companies.”

However, experts cautioned that last year's catastrophe losses have had a significant effect on reinsurers and reinsurance markets, an impact that is likely to be felt by primary insurers, especially for catastrophe coverage in regions prone to natural disasters such as hurricanes and earthquakes.  “One major broker reported last March that at least five Bermuda reinsurers had either stopped underwriting or re-oriented their business since Hurricane Katrina," said Gregory Heidrich, senior vice president, policy development and research for PCI. 

“Numerous sources report that property reinsurance rates are now rising substantially for risks in catastrophe-prone areas, which will increase primary insurers' costs of providing coverage,” said Heidrich.  “These developments highlight the need for public policymakers to look long and hard at how catastrophe risks should be handled.  One year’s solid performance shouldn’t be misinterpreted.  We clearly face very serious risks from natural catastrophes that have to be addressed.”

Analyses by ISO’s risk modeling subsidiary, AIR Worldwide, indicate that insured losses from natural catastrophes should be expected to double roughly every 10 years because of exposure growth driven by increases in the number and size of structures, inflation in construction costs, and other factors.  Because of exposure growth, a one-in-one-hundred-year loss increased from $60 billion in 1995 to $110 billion in 2005, and it will increase to over $200 billion by 2015. 

“While the U.S. property/casualty industry's overall results for 2005 contain a number of positives, those countrywide numbers mask significant problems in specific markets and locations,” said Michael R. Murray, ISO assistant vice president for financial analysis.  “For example, on a direct basis before reinsurance recoveries and excluding losses covered by residual market mechanisms, hurricanes caused $24.7 billion in insured losses on residential and commercial property in Louisiana in 2005 -- $3 billion more than all the premiums insurers charged for property insurance in the state from 1982 to 2004. Similarly, in Mississippi, hurricanes caused $11.3 billion in insured damage to structures and their contents, exceeding all the premiums insurers charged for property insurance in the state from 1986 to 2004.”

The latest predictions from Colorado State University’s respected meteorological team indicate that there is an 81 percent chance of a major hurricane (CAT 3, 4 or 5) hitting the U.S. this year.  There is a 64 percent chance that a hurricane will hit the East Coast, and a 47 percent chance of another hurricane hitting the Gulf Coast. These odds are from one-and-one-half to twice as high as the annual odds over the last century, suggesting that 2006 could be another challenging year in terms of catastrophe losses for the nation and the industry. 

A background paper on insurance industry financial reporting from the Insurance Information Institute is attached http://www.iii.org/media/industry/additional/financials/.

The I.I.I. is a non profit communications organization supported by the insurance industry.

ISO is a leading provider of products and services that help measure, manage, and reduce risk.  ISO provides data, analytics and decision-support solutions to professionals in many fields, including insurance, finance, real estate, health services, government and human resources.  Clients use ISO’s databases and services to classify and evaluate a variety of risks and detect potential fraud.  In the U.S. and around the world, ISO’s services help customers protect people, property and financial assets.

PCI is composed of more than 1,000 member companies, representing the broadest cross-section of insurers of any national trade association.  PCI members write over $184 billion in annual premium, 40.7 percent of the nation’s property/casualty insurance.  Member companies write 50.8 percent of the U.S. automobile insurance market, 39.6 percent of the homeowners market, 33.5 percent of the commercial property and liability market, and 41.6 percent of the private workers compensation market.