Major Storm Activity Could Bring Silver Lining of Price Hikes for Insurers

By | August 19, 2009

The first hurricane of the 2009 Atlantic season may end up skipping past the United States, leaving insurers to hope that the next ominous storm clouds will come ashore with a silver lining.

Insurers can face billions of dollars in claims when monster hurricanes strike populated areas, but they often make their money back — and more –in the following months because they can charge more to renew coverage.

Disasters ranging from hurricanes to earthquakes and jet accidents tend to create demand, and, if severe and frequent, ramp up the cost of coverage.

Before last weekend, no tropical depressions had formed, in contrast to last year when five named storms had already swirled into the Atlantic basin.

“If there are no major storms, more capacity will become available and prices will start to come down,” Shivan Subramaniam, chief executive of commercial property insurer FM Global, said in an interview.

That would be bad news for insurers who have seen prices decline significantly in the past three years.

Even the first major storm of the season, Hurricane Bill, which forecasters expect to strengthen into a strong Category 3 storm, may have little impact on insurers.

The storm’s predicted track bypasses U.S. hot zones, such as Florida and Louisiana, putting it on a course to reach Bermuda in the mid-Atlantic Ocean.

If it keeps its strength, it could veer toward the eastern United States, but more likely it will move north toward eastern Canada, forecasters say.

A storm that makes landfall in the United States probably would have the biggest material impact on insurers, both in losses and future policy sales. The U.S. market accounts for about half of the roughly $1.3 trillion in annual worldwide sales made by property-casualty insurers.

Major players providing catastrophe coverage include the insurance unit of Warren Buffett’s Berkshire Hathaway, Travelers Cos. Inc. and a recently renamed AIG division, Chartis.

AIG had been the most dominant in the sector but has seen some business slip away since the parent company’s financial problems spooked buyers. Insurers such as Travelers, Chubb Corp. and Ace Limited have said they are gaining market share.

While Berkshire has kept lots of capital on the sidelines recently, and underwrote much less insurance in the latest quarter, it appears ready to jump back into the market if prices start rising.

Property coverage sales tend to boom as the Atlantic hurricane season, from June through November, sets in. The most intense storms historically form this month, with the biggest hurricanes ever to pummel the United States, 1992’s Hurricane Andrew and 2005’s Hurricane Katrina, striking in late August.

Subramaniam estimated that a storm must incur between $9 billion and $10 billion in insured losses to convince already strapped customers they need to pay more for coverage. “The economics all indicate that prices need to go up,” he said.

Investors too might hope there are stronger winds on the way. Average hurricane activity tends to be the worst for insurance stocks, said Stifel Nicolaus analyst Michael Paisan in a report on how storms affect the industry. “Losses mount but not enough to change pricing behavior.”

Last year, insurers and reinsurers paid out about $27 billion from U.S. catastrophes, according to data from trade group ISO. Reinsurers provide insurance to other insurers, spreading the risk of losses among several carriers.

Insurers’ capital levels were relatively robust because they were sitting on healthy financial cushions after fewer catastrophes struck in 2006 and 2007.

This year, after being hit by investment losses in recent quarters, insurers can ill afford not to raise their prices if there is another costly hurricane season.

“So far, we have the capital and we have weathered the storm but that could change,” said Loretta Worters, a spokeswoman with New York-based trade group Insurance Information Institute. “It is going to be a wait and see.”

(Reporting by Lilla Zuill. Editing by Robert MacMillan)

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