Focused on Risk

There is a lot of speculation about the condition of the insurance industry both domestically and internationally. It is no secret that the world has endured numerous catastrophes over the last 12 to 24 months. Earthquakes, tsunamis, floods, hurricanes and tornadoes, forest fires, droughts, nuclear power plant meltdowns, and most recently record early winter snowfalls in New England. In addition, the impact of the world wide recession and the near bankrupt sovereign nations of Western Europe (home to many of the world’s largest reinsurers), leave us with huge storm clouds on the horizon.

It is not hard to see that the insurance industry is caught in a cross fire of gargantuan proportions. We are told that the reinsurance markets have sustained pure loss ratios ranging from 106% to 119%. A pure loss ratio does not include insurance company expense ratios. If you loosely estimate 30% for company expenses (normal business overhead), you can easily close in on combined loss ratios of 150% in some cases.

Traditionally, insurance companies could have slightly over 100% combined loss ratios and make up the loss with investment income. In today’s recessionary climate, returns on investments are small to non-existent.

What does this scenario tell us? No company can sustain large losses for any length of time and stay in business. Although the insurance industry has “deep pockets” there is a limit to what any financial entity can endure.

So, what is on the horizon? We believe that the global insurance industry remains extremely well capitalized. It has endured these international disasters for the past several years and survived (so far). But, how much more can they take? If we can put the catastrophes of 2010 and 2011 behind us without reoccurrence, the current market capacity will hold everything in check. Rates and premiums in certain sectors will increase only slightly but remain relatively flat. If, on the other hand, the current string of disasters continues or if we have one huge shock loss, the industry will have no choice but to push rates and premiums up.

How far is up? It could be significant. At the moment, we expect to see domestic property rates increase from 2% to 20% depending upon the insurance company. This is not a projection. Most U.S. companies are in the process of filing rate increases with the various states. That is a matter of public record. In addition, many of the worker’s compensation carriers are filing for rate increases. Casualty lines of coverage, auto, general liability, professional liability, etc seem to be remaining flat.

Is this the beginning of a universal hard market? No, unless the catastrophe trend continues.  Be prepared.