July 31, 2008 More Claims=Lower Prices, What\\\'s Wrong With This Picture?

Surprise! This year there’s an estimated record number of natural catastrophes predicted to occur in the United States. It seems this is becoming old news. Summer arrives with twenty some odd large Atlantic storms, 12-16 becoming hurricanes, and 6-8 expected to make landfall causing “significant damage”. At the same time, the forecasts are proving to be accurate. The number of hurricanes we’ve had in the past few years is very significant. Can’t think of any recent hurricanes? Ask somebody from New Orleans about Katrina. With potential catastrophes on the way and potential damage inevitable, what does this mean for the insurance industry?

First, according to Carl Hedde, head of risk accumulation for Munich Re America, the number of incidents in the United States will result in record losses for the industry. The number of incidents reported for the first half of 2008 (109 in total) exceeds all years dating back to 1980. The direct economic loss from natural disasters  has been $8.1 billion from thunderstorms and $30 billion from wildfires in 2008 alone. www.propertyandcasualtyinsurancenews.com

The insurance industry has openly stated global climate change is a contributing factor in causing these extreme weather patterns. They have even cited human activity as a factor for worsening the situation. Interestingly enough, however, industry experts don’t see these events inducing a “marketwide turn from soft pricing”. In other words, premiums are following a downward trend and not expected to rise! Even though a record number of losses, of both insured and uninsured property, are anticipated to occur this year the prices are going to remain relatively static or even go down. What’s wrong with this picture?

I don’t know, but understanding the cyclical nature of the business, the rebound effect will happen. When it does the prices for insurance will be ascending toward our ever-changing atmosphere. Enjoy the calm before the storm!