2007: In Like a Lion

Those “record” profits insurers posted for 2006 will come in handy by the end of 2007, if the weather during the early part of this El Nino year is any indication.

True to predictions, 2007 is turning out to be tough on insurers’ catastrophe lines – and as of this writing we aren’t even out of March yet.

Already, major snowstorms and rainstorms have hit B.C. and the damage losses have approached a similar quantum of losses the province sustained when the 2003 forest fires hit Kelowna. At last count, the 2006-07 storms have cost insurers more than Cdn$130 million. [It is unclear in which year these catastrophes will fall in the books, since insurers seem to be treating these catastrophe losses as one long, running total.]

In Ontario, a major snow and ice storm managed to knock down power lines and interrupt hydro service. Police reported more than 600 auto collisions over a 48-hour period during the peak of the storm. The Insurance Bureau of Canada reported the storm did cause a “bump” in claims totals – mostly due to auto collisions, wind damage and some sewer backup. But the claims totals did not reach individual insurers’ catastrophe thresholds; hence, they were not recorded separately from companies’ usual claims losses.

What that means, of course, is that auto claims frequencies may be higher in 2007 than they were in 2006. Someone in the industry may want to mention this to the Premier of Ontario, who seems bent on reducing auto rates at a time when auto claims numbers may be going up.

People in the industry are talking about the huge gains reinsurers made in 2006 due to the lack of hurricanes. But such gains are bound to be temporary. The reinsurance market benefited from the additional capacity that started up after insurers had already resolved their 2005 claims. Against the background of this unused, additional capacity, the slow cat year in 2006 was bound to make last year’s profit levels appear artificially high. It will be interesting to see what reinsurers will report in 2007, when European reinsurers start paying out the Kyrill storm claims. Risk Management Solutions (RMS) estimates those claims will cost insurers between $4-5 billion.

Of course all of this has happened early in the year, and so we haven’t even reached the summer hurricane season yet. TSR says the El Nino conditions that kept the 2006 season mild are dissipating, and therefore it is “86% likely that U.S. landfalling hurricane activity in 2007 will be in the top one-third of years historically.” Assuming they are right this time [they weren’t right, for example, about how many hurricanes made landfall last year (0), although they did correctly estimate the number of tropical storms], then 2006 may well represent a year in which insurers made enough profit to pay off the 2007 claims.

So the signs are present that this will be another rough year for cat losses. And yet, despite it all, industry observers are discussing declining commercial rates, a softening market, and an anecdotal quest for amassing more marketshare as if 2007 is going to be no different than 2006. If that’s because underwriting in 2006 was by and large prudent, then industry pundits can no doubt afford to discuss such topics at their leisure. But, speaking generally, although a majority of insurers and reinsurers have posted very strong quarterly results, a few significant industry players didn’t have the kind of stellar financial quarters they had anticipated.

MSA Research Inc. reports that direct premium written by Canada’s property and casualty insurers more or less flatlined in 2006 (increasing only marginally at 1%) with the bulk of insurers’ profits accounted for by high investment income. IBC notes that the release of reserves in 2006 accounted in part for some of the stable loss ratios posted in 2006. In other words, even in a ‘quiet’ year such as 2006, some companies didn’t get the kind of returns they wanted, which raises question marks about how long this current soft cycle is going to last.

Some say this cycle could last another two to three years before the market starts to harden again. But that may presume that we’ve already seen the worst of 2007 during the winter season. Somehow, it doesn’t seem likely the current bad weather we’ve been experiencing across the country [and around the world] will suddenly dissipate into nothing. It may thus be wise to shelve discussions about consolidation, further price reductions and better appetites for underwriting exotic risks until there’s a better idea of how the 2007 storm season is going to shake down.