2011: A year of disasters for insurers

2011 will go down as a record-breaking year for disasters – both in the United States and worldwide. The Federal Emergency Management Agency (FEMA) issued 99 major disaster declarations in 2011 for losses incurred due to tornadoes, floods, tropical storms and Hurricane Irene. The 99 declarations are nearly triple the average of 34 per year dating back to 1953. A major disaster declaration makes federal funding available to individuals and businesses in the affected area.

In addition, FEMA issued another 29 emergency declarations for these natural disasters as well as 114 fire management assistance declarations for the forest fires that occurred throughout the country, primarily in Texas and Oklahoma.

Six of the FEMA major disaster declarations affected Pennsylvania, Maryland and Delaware. Five of the six declarations were for the damages caused by Hurricane Irene and Tropical Storm Lee. The sixth declaration was for the flooding that occurred in the Pennsylvania counties of Bradford, Lycoming, Sullivan, Tioga and Wyoming in April 2011.

In January the National Oceanic and Atmospheric Administration (NOAA) announced that 12 separate weather/climate disasters occurred in the United States in 2011, each of which caused at least $1 billion in damages amounting to a total of $52 billion in both insured and uninsured losses.

Some of these natural disasters were:

According to an estimate by the Insurance Information Institute (III), direct insured losses could exceed $35 billion for the damages caused by the natural disasters of 2011. Obviously these disasters have had an impact on our insurance companies’ bottom lines.

Data from the III shows that the U.S. property and casualty insurance industry recorded $10.4 billion in underwriting losses in 2010. Available data shows that for the first nine months of 2011 underwriting losses were $34.9 billion, more than five times the losses incurred during the same time period in 2010.

Moreover, for the first nine months of 2011, the combined ratio – a key measure of losses and other underwriting expenses per dollar of premium – deteriorated to 109.9 percent from 101.2 percent for the same period in 2010.

The losses experienced in 2011 have left many insurers with lower capital levels. Policyholders’ surplus totaled $538.6 billion as of Sept. 30, 2011, down 4 percent from $564.7 billion as of March 31, 2011. This creates an environment that possibly could affect rate increases.

Recent data from the Council of Insurance Agents and Brokers shows that commercial property and casualty pricing increased 1 percent on average in the third quarter of 2011, versus flat prices in the second quarter of 2011 and a 3 percent reduction in the first quarter of 2011. The Risk Management Society reported that prices for most lines of commercial insurance in the United States have begun to rise for the first time since 2003.

The stage is set for further increases in pricing as low investment yields, increased property reinsurance costs and stabilizing capital positions will make it difficult for the insurers to continue pricing their business below cost. It appears that firming up their pricing will be the only way for them to support their bottom line.

Will the market stay “soft,” or are we looking at the beginning of a “hard” market? Only time will tell.