Agents, Brokers, Carriers: Insurance Outlook Good for 2006

With the insurance industry surviving a year filled with catastrophe losses and the challenge of reauthorizing the terrorism reinsurance backstop legislation, the prospects still seem bright for 2006 according to agents, brokers and carriers.

The Council of Insurance Agents and Brokers Commercial Market Index survey saw rates for commercial accounts experience an average decline of 8.2 percent in the third quarter, the seventh straight quarter of declines for the industry. But, in the wake of the severe hurricane season in 2005 and with the expectation that hurricanes will continue to be increasingly fierce going forward, market observers expect the market to harden in 2006 when it comes to rates. Higher rates = higher profits according to a report by CNN MoneyWatch.

Carriers agree. Allstate (Research) Chief Executive Edward Liddy said earlier this year that the company is targeting double-digit rate increases in areas with exposure to hurricane activity, such as Louisiana, Alabama, Virginia and Texas. Allstate won approval for a 9 percent rate increase in Florida earlier this year and is currently in arbitration to procure an 18 percent hike in the state.

According to the CNN report, Liddy said the double-digit rate increase stems from the severe losses the company suffered in the third quarter as a result of Hurricanes Katrina and Wilma. The company said the hurricanes triggered $3 billion of catastrophe payouts in the quarter, up almost $2 billion from the same quarter last year.

American International Group (Research)’s Chief Financial Officer Steven Bensinger also said that AIG plans to raise its rates for consumers in catastrophe-prone areas due to the rising cost of reinsurance.

Peter Streit, insurance research analyst at Williams Capital Group, said he expects rate increases of 20 percent to 40 percent as less capital becomes available for the reinsurers who offer insurance to property and casualty and other insurers. AIG, which also sells reinsurance, said it plans a 10 percent to 35 percent increase in its own reinsurance products.

“The high catastrophe losses in 2005 have given the industry a psychological advantage in terms of keeping prices high next year,” said Donald Light, senior analyst at Celent LLC. “Overall, it looks like a pretty good year for the property-casualty industry.”

Fitch Ratings agree. In a research note, a team of analysts from the company said net written premium volume should climb to a 5.6 percent growth rate from 3.2 percent in 2005.

But analysts were skeptical that the rate increases will have a long-term benefit for the industry, saying that the insurance market will continue to be highly competitive in 2006 and the pricing could prove to be a temporary phenomenon. Another unknown is that if next year’s hurricane season proves to be even more severe than 2005, a cut into profits is likely, despite any rate increases.