Damn Those Cats…!

Just when the financial weather for both the Canadian and U.S. property and casualty insurance industries was beginning to look downright “balmy” this year, along came the hurricane season – and like the “Four Riders of the Apocalypse” under Charley, Frances, Ivan and Jeanne – literally blew the insurance house down. The timing of the four hurricane catastrophe losses could not have been worse with the upcoming reinsurance treaty renewals sitting in wait.

The total insured cat loss of about US$25 billion incurred by U.S. insurers over the first three quarters of this year is a stark reminder that the insurance business is more complex than a number calculation game and is subject to many vagaries – such as mother nature. Notably, the four hurricanes referred to above account for over 80% of the total insured cat loss thus far recorded in the U.S. Robert Hartwig, chief economist of the New York-based Insurance Information Institute (III), observes that the cat loss resulting from the four hurricanes is almost equivalent to the US$23.5 billion in net profit notched by U.S. insurers for the first half of this year. “Financial results through the first half of 2004 couldn’t have been better – among the best in half a century. On the other hand, Florida’s quartet of calamities – hurricanes Charley, Frances, Ivan and Jeanne – assure that the second half of the year will be one of the worst ever.” And, he notes, the total cat loss from the U.S. market for the full 2004 financial year could well exceed US$30 billion.

The expected impact of this year’s U.S. cat losses on reinsurance pricing for next year differs depending on who you speak to. U.S.-based brokerage Benfield Group believes that the cats will reinforce reinsurance pricing discipline. However, AON Re Americas’ vice chairman Ross McKenzie expects reinsurance pricing and terms in the upcoming treaty renewals should be a case of “status quo”. He says that, “[the four hurricanes] took the cream off the top of the pudding”, but will unlikely impact reinsurance pricing outside of the so-called “hurricane alley”.

On the Canadian front, insurers and reinsurers have had their share of weather-related cat losses this year (although no single loss event on the scale of the U.S. hurricanes, or for that matter, last year’s cost of Hurricane Juan and the B.C. forest fires). While Canadian licensed reinsurers expect that the yearend treaty renewals will remain largely unchanged in price and terms for most lines of cover (see cover article of this issue for further details), some company CEOs believe that the cost of the U.S. hurricanes, as well as typhoon losses from Japan, cannot be excluded from the global equation and the impact this will have on local capacity and pricing. “Originally we expected a softening of 10%-15% on [property catastrophe] rates. However, given the hurricanes in Florida and the Caribbean, along with the cyclones and earthquakes in Japan, this should be revised to a possible ‘renew as is’. Some Canadian insurance companies feel that losses that occur in other parts of the world should not impact their prices. However, the world property catastrophe market capacity only exists because of the world market volume, and Canada on its own would not be able to generate that capacity,” observes Andre Fredette, senior vice president of CCR Canada. Industry analysts also expect that the mega cat losses of this year will boost demand for costly retrocessional cover, which will spill over into reinsurers’ costing.

And, while 2004 definitely seems to be the “year of the cat”, p&c insurers from the primary companies to reinsurers continue to ride out a “storm” of a different kind. Although the financial returns of North American insurers for the first half of this year have been stellar, the insurance industry continues to be bedeviled by capital shortage, under-reserving, increasing “long-tail” liability cost exposures and that shadow of doubt to just how recoverable are “reinsurance recoverables”. As a result, insurers remain challenged in attracting new shareholder capital while the financial rating agencies continue to hold a fairly dour view of the industry’s long-term stability and prosperity.

Notably, the financial results of both Canadian and U.S. insurers for the first six months of this year indicate that the hard market’s pricing momentum has all but stalled, which could signal a slow downward spiral in shareholder returns. Hartwig points out, “the fact of the matter is that pricing seems to be weakening more rapidly than anyone anticipated. Net written premium growth came in at just 4.6% during the first six months of 2004, well under the 11% recorded during the same period last year…the combination of rising inflation and slower premium growth could plunge the industry into a negative real growth situation by late this year or early 2005 for the first time since 1999.”