U.S. Insurers Withstood Record Catastrophe Losses with Strong Capitalization, Sound Risk Management

January 1, 2011 / 4 min read

Kaanapali Beach, Hawaii, May 9, 2006 — 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, an industry leader said.

At $57.7 billion, "last year's catastrophe losses dwarf even those from 9-11 and Hurricanes Andrew and Iniki in 1992," said Frank J. Coyne, chairman, president and CEO of ISO, in remarks at the 80th Annual Meeting of the American Association of Managing General Agents (AAMGA).

"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," said ISO's chief executive.

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," said Coyne.

Although catastrophe losses totaled nearly $58 billion, ISO estimates U.S. insurers will ultimately be responsible for just $31 billion to $36 billion on a net basis after reinsurance recoveries, according to Coyne.

ISO's chairman 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, said Coyne, 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," said Coyne. "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," said Coyne.

"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. In sum, insurance markets are softening — not hardening as the pundits predicted."

In his remarks on the state of the property/casualty industry, Coyne cited analyses by ISO's catastrophe modeling subsidiary, AIR Worldwide, to show how the industry's growing exposure accounts for increasing catastrophe losses. The AIR models adjust for increases in the costs of construction and the number of residential and commercial buildings, plus changes in their characteristics.

"AIR's analysis indicates catastrophe losses double about every ten years, just because of exposure growth. AIR modeling indicates Hurricane Katrina was just a one-in-thirty-year event, and catastrophes causing $100 billion or more in insured losses are easy to imagine," he said.

Coyne also mentioned the threat of terrorism and discussed one scenario in which terrorists attack New York with weapons of mass destruction. "The AIR Terrorism Loss Estimation Model indicates insured losses could exceed $750 billion," he said.

Noting the Terrorism Risk Insurance Act and its federal reinsurance backstop are due to expire in 2007, Coyne urged development of "a long-term mechanism for insuring against terrorism," be it public or private or a partnership that brings private, industry and government together.

In the near term, ISO expects the industry's strong capacity, with surplus having risen to $427 billion at year-end 2005, to fuel further rate cuts in 2006, said Coyne. He projected industry premium growth for 2006 would be less than 1 percent.

"But despite weak premium growth, we expect insurers' underwriting results to improve as catastrophe losses recede from 2005's record level," he said.

Coyne challenged the managing general agents and the industry at large to "do well by doing good — seeking opportunities to profit by helping society meet its changing insurance needs."

About ISO
ISO is a leading provider of products and services that help measure, manage and reduce risk. ISO provides data, analytics and decision-support solutions to professionals in many fields, including insurance, finance, real estate, health services, government and human resources. Clients use ISO's databases and services to classify and evaluate a variety of risks and detect potential fraud. In the U.S. and around the world, ISO's services help customers protect people, property and financial assets. For more information about ISO, visit the company's website at www.verisk.com.

Release: Immediate

Contacts:
Giuseppe Barone / Erica Helton
MWW Group (for ISO)
201-507-9500
gbarone@mww.com / ehelton@mww.com