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Company forecast: Partly cloudy

Insurers are feeling the effect of natural disasters around the world

By Phil Zinkewicz

A large number of extreme weather events hit the United States in the first half of this year; and, worldwide, 2008 may go down in history as having one of the highest numbers of natural catastrophe victims, according to Dr. Robert P. Hartwig, president of the Insurance Information Institute (I.I.I.). He says analysts point out that there have never been so many tornadoes recorded in the first six months of a year.

Heavy rain and hail and subsequent flooding in Iowa and other Midwestern states also caused billion-dollar losses and had a significant impact on the insurance industry. The overall loss caused by the floods on the Mississippi and elsewhere is likely to be around $10 billion, with an insured loss in the upper three-digit million-dollar range, according to Hartwig.

Worldwide, there were about 400 natural catastrophes through the end of June 2008, analysts report. The largest number of events ever recorded in one year was 960 in 2007. Overall losses as of June of this year totaled about $50 billion, according to analysts participating in a special Webinar sponsored by Munich Re and the I.I.I. The insured losses are substantial and are above the average of the last 10 years.

It might be expected that the severe weather conditions plus a soft market would have a negative effect on insurance company performance on both sides of the Atlantic. However, the Standard & Poor’s rating agency is not overly pessimistic, at least on the American side.

Standard & Poor’s does not expect the 2008 Midwest floods to affect ratings or outlooks for the majority of companies that it rates. However, insurers that are geographically concentrated in the affected states, especially those focused on Indiana, Illinois, Iowa and Wisconsin, may have proportionately higher losses, which, combined with the effects of the softening pricing cycle, weak financial markets, and an active catastrophe season, may trigger a few ratings actions.

S&P reports that although the recent floods have been compared to the Great Flood of 1993, which affected Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wisconsin, there are several differences. “Overall, precipitation levels year-to-date in the Midwest are higher and covered a much larger area than for the same time period in 1993,” says the rating agency. “However, above-average rainfalls in 1992 made the ground much more saturated in 1993 than this year.

“In 2008, the major flooding events occurred earlier in the calendar year than in 1993, which occurred in late June and through July of that year, substantially affecting the July germination (the process whereby seeds or spores sprout and begin to grow) and further affecting the crops in 1993,” S&P continues. “As floods recede in the Midwest, and if weather remains favorable, it is possible that the effects on crops might not be as significant as in 1993.

“Nevertheless, we expect that insured losses resulting from the 2008 Midwest floods will be as large as those caused in 1993 or even larger because although there may be less crop failure, the price of the crop has substantially increased due to the increase in commodities prices. It will not be possible to establish the insurable damage until the floods totally recede and crop-related losses are calculated. By mid-year 2009, the crop will have been sold and its final price settled.”

Standard & Poor’s believes the majority of the losses in relation to the 2008 Midwest floods will emerge from the following lines of businesses: flood insurance provided by the federal government through the National Flood Insurance Program (NFIP) and Multiple Peril Crop insurance, which is provided by private insurers and reinsured by the federal government and private reinsurance carriers.

“The government will likely retain large losses because it fully insures flood damages (for participating residential and commercial policyholders) and provides an important backstop of losses in multi-peril crop insurance for commercial insureds,” S&P reports. “The impact on the insurance industry is considerably reduced by the role played by the government in these two specific lines of business.

“In addition, some increased loss activity will emerge from the farmowners, homeowners, commercial multi-peril, business interruption, and allied lines of business. Most of these losses will likely result from covered perils which occurred during the initial storms, tornadoes, high winds, and lightning. However, the large flood losses will not likely be covered unless they are covered by the NFIP because of standard policy exclusions of flood risks. Other more marginal losses stemming from the initial storms and floods may arise as comprehensive coverage claims from auto lines of business.”

As a stand-alone event, the 2008 Midwest floods are expected to have a relatively small impact on insurers, but the effects will vary widely among the carriers, according to S&P. “National/multinational carriers with product and geographic diversification will not be subject to losses that would have an effect on capital, and no rating actions are expected for these companies.

“However, smaller, less diversified regional carriers with concentrated portfolios in the Midwest (especially those concentrated in Indiana, Illinois, Iowa, and Wisconsin) may suffer proportionately large losses, possibly affecting capital positions with potential negative rating implications,” according to Standard & Poor’s. “However, even in such cases, this would only be a contributing factor in combination with others that could bring about ratings changes.”

Across the pond

Turning to the other side of the Atlantic, S&P says that underwriting performance in the U.K. non-life insurance industry in 2007 was worse than in 2006 and at its weakest since 2001. Two large weather-related losses caused most of the deterioration in 2007, although continued widespread real price erosion also played its part. “In the absence of very large weather-related losses, we expect underwriting performance in 2008 to be better than in 2007, although the extent of the improvement depends on how pricing develops throughout the year,” says S&P.

“While there is evidence of price discipline, and even some encouraging signs of price hardening, it is not yet clear if 2008 will see an overall improvement in the industry’s underlying performance or not. We undertook a preliminary review of the available annual Financial Service Authority (FSA) insurance returns for the year ended December 31, 2007, and our review shows that the industry net combined ratio in 2007 deteriorated to 102.7 from 96.1 a year before.

“Given the scale of weather-related losses, estimated at £3 billion gross, the size of the decline is understandable. However, the net combined ratio for the accident year showed even more market deterioration to 110.4 from 101.0 in 2006. Moreover, by comparing the accident year net combined ratio with the reported net combined ratio, we can see that the reported net combined ratio in 2007 benefited quite considerably from the release of prior-year reserves. U.K. non-life insurers have been releasing prior-year reserves each year since 2001, and the impact on the reported net combined ratio has become more favorable each year. Insurers cannot sustain the level of this benefit, which reached 7.7 percentage points in 2007, and we expect the effect of releasing prior-year reserves to be lower in 2008,” says S&P. *

The author
Phil Zinkewicz is an insurance journalist with some 30 years’ experience covering the international insurance and reinsurance arenas. He was the insurance editor of the Journal of Commerce for a number of years, handling all their domestic and international supplements. In addition, he regularly writes for a number of London publications.



Standard & Poor’s Ratings Services does not expect the 2008 Midwest floods to affect most insurers’ ratings or outlooks.














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