Posted on Aug 24, 2011 by Sergio Ulloa
Fresh analysis released this week by worldwide insurance and credit rating agency AM Best highlights the pronounced effect natural disasters and catastrophic events have had on insurers' balance sheets, in what is now perhaps the most influential trend affecting the international insurance industry this year.
AM Best surveyed over a hundred United States-based property and casualty (p&c) insurers and found that, as a whole, the industry had taken US$27 billion worth of pre-tax net catastrophe losses in the first half of 2011, already exceeding the total for the whole of last year which reached US$19.6 billion. According to the contributed data, the insured catastrophe-related losses reported in the first six months of 2011 are US$15.1 billion, or 127 percent, greater than the US$11.9 billion reported for the first half of 2010. AM Best assert that their survey results are representative of 80 percent of the US p&c industry in terms of net written premiums in the first half of 2011.
AM Best notes that the insurance industry's personal lines business experienced much of these losses with US$15.1 billion in claims, followed by the commercial lines segment reporting US$8.3 billion. Meanwhile, the reinsurance costs for the companies surveyed, which would include losses from global catastrophe events, totaled around US$3.6 billion. Overall, first half cat losses amounted to 12.6 points on the combined operating ratio, a measure of how well insurers can balance their costs against earnings, compared to just 5.7 points measured during the same period last year.
Insurers reported that a majority of their losses were related to the unprecedented sequence of tornadoes and hailstorms
that hit Midwest and South-eastern United States in April and May of this year. Included among the storms were those that caused heavy damage in Tuscaloosa, Ala. and Joplin, Mo. which as AM Best noted, ranked as two of the most expensive tornadoes in history. International natural disasters, most notably the record 9.0-magnitude earthquake and subsequent tsunami in Japan, and the earthquake and flooding in New Zealand, also pushed the claims toll up for American insurers and had a residual effect on the balance sheets of companies with more global portfolios.
The Oldwick, N.J.-based ratings agency has long recognized catastrophic loss as the primary threat to the solvency of property and casualty insurers due to the severe, rapid and unexpected impact that can occur. Global demographic and economic trends have been pushing property values and concentration risk in catastrophe-prone areas upwards and insured exposure has in turn escalated rapidly in the past decade. As more and more people (and clients) inhabit these areas, insurers must take on more responsibility to provide coverage against a wide array of new concerns, including terrorism. As a result, the worldwide insurance industry's exposure to catastrophe losses continues to rise.
Despite the heavy loss burden presented in this information, AM Best remains confident of the US p&c sector's operational stability going forward. The ratings agency believes that the overall industry has the capital available to absorb these losses and that any impact from natural catastrophes in the first half of the year would be from an earnings perspective not a long-term capital one. A surge in claims could in fact trigger a rise in insurance rates to offset losses, forcing more exposed players to economize and enabling those still in the market to charge more for coverage.However the general insurance sector will certainly be challenged through the remainder of 2011 as the budgets for catastrophe losses are exhausted and the industry hasn't been tested by any hurricane related losses yet. US Insurers are now entering the quarter that has traditionally been hit the hardest by hurricane losses and forecasters are predicting an above average Atlantic storm season.
"AM Best believes a potentially devastating hurricane season would make catastrophe-related losses climb even higher and may be enough to impact the market cycle," the ratings agency concluded.
While some insurance analysts confirm that the industry has performed better than expected given the circumstances, the prevailing soft pricing market has contributed to significant drops in net income being reported by individual insures during the first half of the year despite continued reserve releases. Insurance companies have found themselves unable to raise rates at all for three years due to intense competition, overabundant supply and lower investment yields. Analysts warn however that a significant hurricane could be enough to trigger premium hikes at long last.
Natural disasters can not be held accountable for all insurer woes worldwide however. China Life Insurance Co, China's and indeed world's largest life insurer by market value, posted a larger than expected 28.1 percent drop in first-half net profit. China Life has attributed the decline in earnings to sluggish investment returns from volatile stock markets and a spike in traditional insurance contract liabilities. A large wave of China Life's written policies matured in the first-half of this year, which lead to the insurer into committing a large proportion of its income to settle payouts to clients. This could place some pressure on the Chinese insurer's profitability going forward.
What wasn't included in the company's briefing was the impact increased foreign competition
could be playing on the entrenched state-owned insurer's bottom line. This is perhaps the second major development occurring in the international insurance industry this year, companies who will now be looking to expand in emerging Asian economies to offset insured losses felt in mature markets.
A.M Best Company was founded in 1899 and is a full-service credit rating organization dedicated to servicing the financial services industries, including the banking and insurance sectors.
China Life Insurance
China Life Insurance Company Limited (China Life) is a People's Republic of China-based life insurance company. The products and services include individual life insurance, group life insurance, accident and health insurance. The Company operates in four business segments: individual life insurance business, group life insurance business, short-term insurance business, and corporate and other business.