Mother Nature Gives Insurers A Break

Absence of catastrophes sends profits soaring, but draws fire from critics

BY SAM FRIEDMAN

It might seem odd to pick a nonevent as the most important story of 2006, but after two consecutive years of being hammered by record hurricane losses, property-casualty insurers are more than grateful for the reprieve they received this past season.

Last year at this time, three storms severe enough to make the worst-10 losses of all time-Hurricanes Katrina, Rita and Wilma-had combined to drain some $45.2 billion from carrier coffers.

In fact, Katrina-at a total insured loss of some $35 billion-was by far the worst single event of all time.

All this came on top of 2004's "grand slam" of hurricane losses, when four major storms hit the U.S. mainland in just 90 days, leaving behind at least $20 billion in insured claims.

The double-whammy of 2004 and 2005 drew billions of new capital into the property-catastrophe market-much of it via Bermuda-as investors sought to cash in on soaring prices for coverage in disaster-prone regions. However, existing players with heavy cat exposures-most prominently Allstate-began to retrench to keep their worst-case scenarios under control.

The massive storm losses also put pressure on public policymakers to ease coverage scarcity and consider longer-term solutions, one of which-the idea of a national catastrophe fund to back up private carriers-split the industry politically.

Meanwhile, underwriters held their breath, bracing themselves for another catastrophic season-but the sun kept shining, much to the delight of the industry and its investors, as profits soared.

Indeed, while they say every cloud has a silver lining, in this case, every sunny day may in fact have a stormy future, as insurers are likely to come under fire from legislators, regulators and consumer advocates for sky-high property premiums in coastal states.

"The lack of catastrophes this year will create its own set of problems, including accusations that we cried wolf when we raised rates and are now price-gouging," warned Edmund Kelly, CEO of Liberty Mutual, during his recent keynote address at the 18th Annual Executive Conference for the Property-Casualty Industry, co-sponsored by NU's parent company.
Industry leaders emphasize, however, that critics with 20-20 hindsight don't understand pricing must be risk-based, and that after two years of record disaster losses and rising reinsurance costs, premiums had to be hiked substantially.

"It's like saying someone who survives Russian roulette faced no risk just because the gun didn't go off," joked Mr. Kelly, "when we all know there is still a bullet in the chamber, and if you play the cat game long enough, it's going to go off."

Indeed, 2006 marked the 100th anniversary of another massive catastrophe-the 1906 San Francisco earthquake. Insurers argue that the next "Big One"-whether it will involve the ground shaking, the wind blowing or terrorists striking once again-could come at any moment.

Catastrophe modelers toughened their standards and raised the bar for probable-maximum-losses, while insurance rating agencies pressed carriers on their preparation for disaster risks.

But when push comes to shove, this year proved that while it might not be nice to fool Mother Nature, in fact, Mother Nature has no qualms about fooling mankind-for better for worse.

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