“The basic explanation for the resilience and strength that P/C insurers have demonstrated during the current and countless past financial crises are attributable to a deeply entrenched and conservative operating philosophy that leads directly to superior risk management strategies,” wrote Dr. Robert Hartwig, an economist and president of the I.I.I., in his year-end 2008 analysis of the industry’s financial performance. “Insurers necessarily run their business under the assumption that every day is a potential doomsday—because it is.”
Despite sizable losses in their investment portfolio, P/C insurers ended 2008 well capitalized by historical standards and prepared for the 2009 hurricane season, which starts on June 1. Dr. Hartwig pointed out that the ratio of premiums written to available surplus, a simple measure of financial leverage, stood at 0.95 as of December 2008. This meant that for every 95 cents in premium written insurers had $1 in capital (surplus) on hand as 2008 concluded. By this measure the industry’s capital position is stronger now than it has been before any of the major catastrophic events over the past quarter century, including the September 11, 2001, terrorist attack (which resulted in insured losses of $32.5 billion) or Hurricane Katrina in 2005 (with $41 billion in insured losses).
Moreover, Dr. Hartwig noted that P/C insurers remained profitable in 2008, earning $2.4 billion in net income after taxes. That figure was down $60.1 billion, or 96.2 percent, from the $62.5 billion profit in net income after taxes that P/C insurers realized in 2007, largely because of the poor investment environment in 2008 and higher losses on insurance operations. The latter was driven by $26 billion in insured catastrophe losses. Indeed, one event, September 2008’s Hurricane Ike, accounted for about 40 percent of the year’s overall catastrophe losses. Ike was the fourth-most expensive hurricane in U.S. history.
“The third quarter is traditionally the most expensive for insurers due to the fact that the peak of hurricane season occurs in September,” Dr. Hartwig stated. “Yet despite a 12 percent year-to-year drop in the P/C industry’s capacity in 2008 as compared to 2007, insurers currently hold more than $400 billion in capital in the form of policyholder surplus for whatever events the future might hold.”