U.S. insurers withstanding record catastrophe losses

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, a provider of products and services that help measure, manage and reduce risk.

Coyne recently shared his views at the 80th annual meeting of the American Association of Managing General Agents.

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."

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.

Coyne 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, he said.

In sum, insurance markets are softening -- not hardening as the pundits predicted, he said. 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."