Escalating Price of Natural Disasters Could Devastate P&C Industry

Natural disasters are getting costlier while the shrinking economy is making property and casualty (P&C) insurers more vulnerable according to EMB, a global actuarial consulting firm. As a result, a major catastrophic event during this hurricane season has the potential to devastate the US insurance landscape, which has already seen industry giant AIG crippled during the economic crisis.

Source: Source: BestWeek | Published on June 23, 2009

According to EMB, a number of factors have combined to put P&C insurers in a vulnerable position heading into the 2009 hurricane season. The primary factors are the rising costs of damages caused by natural disasters, the increased population concentration in areas susceptible to catastrophic events, and the lower levels of capitalization across the P&C industry.

The last decade has seen a steep increase in the cost of natural disasters, with nine of the twelve most expensive catastrophic events in US history taking place since 2004. A prime example is Hurricane Ike : in 2008, which was only a Category 2 hurricane when it hit Galveston, Texas. Despite its relative low strength, Ike was still the third most expensive hurricane in US history. As a result, even without any land-falling hurricanes worse than Category 2, 2008 was the fourth most expensive catastrophe year in US P&C history.

“The damage done by Hurricane Ike last year took a lot of P&C insurers by surprise despite the possibility of major damage being built into all catastrophe models,” said Alice Gannon, Senior Consultant at EMB. “Our industry must be prepared at all times to meet the increasing costs of dealing with natural disasters – something that’s getting much harder to do given the current state of the economy.”

At the same time costs are rising, the global economic collapse has led to major declines in invested assets and investment income. This has resulted in significantly lower capitalization for the P&C industry now than at the start of the 2008 hurricane season. Across the industry, policyholder surplus is down 13% from its peak in 2007. The instability in the financial markets will also make it much harder to raise additional capital quickly, meaning that P&C insurers could be in serious trouble in the event of a “mega-catastrophe” along the lines of Hurricane Katrina in 2005. In addition, an illiquid marketplace may be especially dangerous in case of a cash-flow shortfall resulting from a catastrophic event. According to EMB, a catastrophic event approaching $100 billion in damage would likely result in multiple insolvencies or forced mergers.

Despite the possibility of this worst-case scenario, P&C insurers have actually done a good job of protecting themselves relative to other sections of the financial services industry, which have already been decimated by the economic collapse. EMB credits the industry-wide adherence to fundamental risk management principles for the relative success of the P&C industry, with meltdowns like AIG being the exception rather than the norm.

“The P&C industry was built with an expert understanding of risk management at its core,” continued Gannon. “Because enterprise risk management is so engrained in the way P&C insurers do business, we’re seeing organizations survive, and in some cases thrive, in conditions that have destroyed stalwarts in other industries.”

About EMB in North America

Established in 1993, EMB (www.emb.com) is a leading international consulting firm specializing in property and casualty (P&C) insurance. Its services cover personal insurance, commercial insurance, and reinsurance. EMB offers C-Counsel Business Consulting, Actuarial Consulting, Professional Development, and Marketing Sciences.