Strong capitalization, sound risk management and efficient global risk sharing enabled the U.S. property/casualty insurance industry to withstand record-setting catastrophe losses in 2005, but the industry also should keep its eye on emerging risks, according to Frank J. Coyne, chairman, president and CEO of ISO. Coyne recently shared his views on the 2006 property/casualty industry at the 80th annual meeting of the American Association of Managing General Agents (AAMGA) being held in Ka’anapali Beach, Hawaii.
At $57.7 billion, “last year’s catastrophe losses dwarf even those from 9-11 and Hurricanes Andrew and Iniki in 1992,” Coyne said. “That insurers have been able to cover those losses is a testament to their strong capitalization prior to last year’s storms and their risk management,” said ISO’s chief executive.
The industry’s ability to withstand the record losses driven by hurricanes Katrina, Wilma, Rita and others “is also a testament to the efficiency and scale of global risk-sharing mechanisms,” Coyne said.
Although catastrophe losses toted nearly $58 billion, ISO estimates U.S. insurers will be responsible for just $31 billion to $36 billion on a net basis after reinsurance recoveries, according to Coyne.
ISO’s chairman reminded more than 300 wholesale property/casualty managing general agents and other insurance professionals that rates on commercial renewals have been dropping, according to ISO MarketWatch and the Council of Insurance Agents and Brokers, with rates declining an average of almost 3 percent for all commercial accounts in the first quarter of 2006.
The only exception, Coyne said, was rates for commercial property coverage, which rose about 2 percent as a result of increases in catastrophe-prone areas.
Coyne cited extraordinary losses driven by the natural disasters in explaining the rise in commercial property rates.
“Excluding amounts covered by residual market mechanisms, the hurricanes of 2005 caused $25 billion of insured losses on residential and commercial properties in Louisiana alone,” Coyne said. “That’s $3 billion more than all the premiums insurers charged for property insurance in the state during the 23 years from 1982 to 2004.” Moreover, reinsurance rates are now rising substantially for U.S. risks in catastrophe-prone areas, increasing primary insurers’ costs, he added.
“Despite headlines about rate rises in areas devastated by last year’s catastrophes, the Consumer Price Index for tenants’ and household insurance dropped 2.2 percent in the first quarter of 2006. In sum, insurance markets are softening — not hardening as the pundits predicted … Insurers’ rate of return was virtually flat in 2006. That set the state for further market softening … Low investment yields have lowered insurers’ ability to use investments to offset underwriting losses,” he added.
Coyne also noted that competition and technology may push out some market players. “Intensifying competition has taken its toll on underwriting results,” he said. “Technology has advanced insurers’ ability to hone in on the right price to risk … There are powerful models that don’t use credit. [The industry can now] operate with scalpels instead of meat cleavers.”
As technology improves, Coyne said the “chasm is growing between state-of-the-art technology haves and have nots. The have nots will fall victim to adverse selection, and the haves will prosper,” he said.
In his remarks on the state of the property/casualty industry, Coyne cited analyses by ISO’s catastrophe modeling subsidiary AIR Worldwide to show how the industry’s growing exposure accounts for increasing catastrophe loses. The AIR models adjust for increases in the costs of construction and the number of residential and commercial buildings, plus changes in their characteristics.
“Air’s analysis, indicates catastrophe losses double about every 10 years, just because of exposure growth. AIR modeling indicates Hurricane Katrina was just a one-in-30 year event and catastrophes causing $100 billion or more in insured losses are easy to imagine,” he said.
Even if weather-related events don’t get worse, Coyne said there is potentially more exposure, particularly in coastal areas. Today, there are more homes in risky areas, and those homes are larger and have more amenities than their predecessors, he said. Replacement values, both in residential and commercial property, also are higher because of construction costs. Construction costs have increased 40 percent in the past 10 years, he said.
Furthermore, the insured value in the population on the coast has increased. Coyne noted Florida and Texas are the two states most frequently struck by hurricanes, and the populations also are growing the fastest in those states.
Coyne also mentioned the threat of terrorism and discussed one scenario in which terrorists attack New York with weapons of mass destruction. “The AIR Terrorism Loss Estimation Model indicates insured losses could exceed $750 billion,” he said.
Noting the Terrorism Risk Insurance Act and its federal reinsurance backstop is due to expire in 2007; Coyne urged development of “a long-term mechanism for insuring against terrorism be it public or private or a partnership that brings private industry and government together.
Cyber risks also pose a threat, Coyne indicated. “The focus of attacks are shifting from vandalism to economic gain. Cyber risks caused $14.2 billion in damage last year,” he said.
In the near term, ISO expects the industry’s strong capacity, with surplus having risen to $427 billion at year-end 2005, to fuel further rate cuts 2006, Coyne said. He projected industry premium growth for 2006 would be less than 1 percent.
“But despite weak premium growth, we expect insurers’ underwriting results to improve as catastrophe losses recede from 2005’s record level,” he said.
Coyne challenged the managing general agents and the industry at large to “do well by doing good — seeking opportunities to profit by helping society meet its changing insurance needs.”
ISO is a provider of products and services that help measure, manage and reduce risk. Web site: information about ISO, visit www.iso.com.
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