Sound risk management, investment plus for insurers

May 8, 2006

U.S. property/casualty insurers managed to increase earnings and add to their capital base in 2005 despite record catastrophe losses, according to Insurance Services Office (ISO) and the Property Casualty Insurers Association of America (PCI).

Sound risk management and strong investment results lead to the insurance industry’s rise in net income of 11.7 percent, or $4.5 billion, to $43 billion in 2005 from $38.5 billion in 2004. Reflecting the industry’s income, its consolidated surplus, or statutory net worth, increased 9.2 percent, or $35.8 billion, to $427.1 billion at year-end 2005 from $391.3 billion at year-end 2004.

Net income and surplus increased even though direct insured property losses due to catastrophes rose in 2005 to a record $57.7 billion — more than double the $27.5 billion in direct insured property losses due to catastrophes in 2004, according to ISO’s Property Claim Services (PCS) unit.

“But countrywide data for all lines often masks significant problems in specific markets and locations,” said Michael R. Murray, ISO. “For example, before reinsurance recoveries and excluding losses covered by residual market mechanisms, the hurricanes of 2005 caused $24.7 billion in insured losses to residential and commercial property in Louisiana — $3.1 billion more than all the premiums insurers charged for property insurance in the state during the 23 years 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 during the 19 years from 1986 to 2004.”

These consolidated industry results are estimates for all private property/casualty insurers based on reports accounting for at least 96 percent of all business written by private U.S. property/casualty insurers.

“The insurance industry’s financial results for 2005 attest to insurers’ risk management and, in particular, their use of reinsurance to spread risk globally. “ISO’s analysis indicates foreign insurers and reinsurers will ultimately cover from $14 billion to $19 billion of the losses from last year’s catastrophes,” said ISO’s Murray. “But the cost of reinsurance for U.S. property risks in catastrophe-prone areas is now rising sharply, making it more expensive for primary insurers to provide coverage.”

Adjusting for losses covered by foreign reinsurers, residual market mechanisms and the Florida Hurricane Catastrophe Fund, ISO estimates that private insurers’ financial results for 2005 included net catastrophe losses totaling $31 billion to $36 billion — up from about $15 billion in 2004.

Reflecting higher net catastrophe losses, the industry suffered a $5.9 billion net loss on underwriting in 2005 — a $10.2 billion adverse swing from the $4.3 billion net gain on underwriting in 2004.

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