Lloyd's of London insurer, Hiscox, has warned that a series of natural disasters, including the Japanese earthquake, combined with the political unrest in the Middle East have made 2011 the costliest year ever for the insurance industry.
Hiscox slipped into the red with a first-half loss before tax of £85.6m, compared with a profit of £97.2m a year ago. The only bright spot was its UK retail business, which provides household and luxury car insurance to wealthy people as well as commercial cover, and made a record profit of £25.2m.
After just six months, 2011 is already the most expensive catastrophe year for the insurance industry on record – worse than the full 12 months of 2005, the previous highest on record. The devastating earthquake and tsunami in Japan, combined with the quake in New Zealand, floods in Australia and tornadoes in the eastern US inflicted losses of more than $50bn (£30.6bn) on the industry.
Chairman Robert Hiscox said: "It has been an exceptionally challenging first half-year, but we are in good shape to take advantage of increased rates in some catastrophe areas, and to accelerate the momentum of our retail businesses."
US catastrophe reinsurance rates have gone up by 10%, on average, while premiums in loss-affected areas such as Japan, Australia and New Zealand have seen much bigger increases, some in excess of 50%.
Bronislaw Masojada, Hiscox's chief executive, explained that "feast follows famine" in the insurance industry. As insurance rates go up, 2012 promises to be a much better year. Depending on the hurricane season, Hiscox could still make a small profit this year.
"We believe it is well-positioned to benefit from areas where rating is stronger which has been partially shown by a 20% increase in business written in May/June in its London market reinsurance book," said Peel Hunt analyst Sarah Lewandowski.
The company's European business managed to break even in the first half, despite some large losses. It was hit by the theft of two paintings from a Dutch museum – its biggest fine art loss in 10 years, although the paintings could resurface as they cannot be sold on the open market – as well as a large kidnap claim and a technology loss.
To offset losses from natural disasters, Hiscox has been beefing up its retail operations, which now make up 45% of business, compared with 25% a few years ago. The figure could reach 50% this year.
With climate change increasing the risk of flooding and natural disasters, Masojada warned consumers and businesses could see insurance premiums go up in coming years. "We observe what happens rather than trying to predict what happens and we adjust the pricing every 12 months. We are very aware that climate risk is driving volatility and ultimately prices could go up in loss affected areas." He noted that people are increasingly moving into risky coastal areas, particularly in the US.