July 5, 2007

SOURCE: InsuranceNewsNet, Inc.

After a relatively quiet and very prosperous period for the Property/Casualty (P/C) industry, experts say profits for first quarter 2007 are down while potential threats are up. Earnings declined 6% industry-wide as premium growth went down to $15.8 billion from $16.7 billion during the same period in 2006 and from $17.7 billion in first-quarter 2005.

Net written premiums gained less than 1% ($111.4 billion) compared to the 1.8% recorded in the first quarter of 2006.

The P/C industry's combined ratio went up from 91.1% to 91.7% which indicates a less profitable the quarter.

Industry analysts said this was the poorest growth for any first quarter since 1992 and blamed intense competition and cheaper average insurance prices for the slump. However, the Property Casualty Insurers Association of America (PCIAA) said the poor financial showing was triggered by a single deal involving Berkshire Hathaway Inc.

In March, Berkshire Hathaway Inc. assumed the liabilities of Equitas Holdings Ltd. – the reinsurer set up by Lloyd's of London – amounting to $9.3 billion. Berkshire collected $7.1 billion premium as part of the transaction.

And there’s more bad news ahead for the P/C insurance industry. It was the absence of terrorist attacks and major catastrophes that allowed the insurance industry to bounce back from the crippling effect of hurricane Katrina and the 9/11 attacks which hit with a combined force of more than $63 billion.

This year’s prediction is more ominous. Climate forecasters are not very optimistic either as they expect 10 hurricanes will hit the United States this year and half of those will be major storms. Fears of major terrorist offensive this summer were raised with the recent car bomb attacks in London and Glasgow.

The insurance industry also found out that making billions of dollars in profits has its drawback: it does not win a lot of sympathy from Congress. The insurance industry has been calling for the immediate renewal of the National Flood Insurance Program (NFIP) and the Terrorism Risk Insurance Act (TRIA), which have been languishing in the House. Observers say justifying billions of dollars in federal subsidies isn’t easy in light of the insurance industry’s record profits.

TRIA was established as federal backstop for insurance claims related to acts of terrorism by sharing private insurance losses in case of a terrorist attack. Providers usually reinsure their policies through General Re, Benfield and other companies.

But the unpredictability of the occurrence of attacks and the weapons terrorists might use has made many reinsurance firms unwilling to issue high-risk policies. TRIA was meant to support private insurers while the reinsurance market is still in development.

Critics say the extension of TRIA, which is set to expire at the end of this year, is unnecessary and a short-term solution at best. The U.S. Treasury announced that it cannot support a 10-year extension of TRIA and called on private insurers to take a bigger role.

In 2005, the Consumer Federation of America called TRIA a free “temporary free insurance (really reinsurance) to a financially well-off industry for a three-year period.” While Congress extended TRIA for another two years anyway, its continued existence through the next decade is still under debate.

NFIP was created in 1968 to sell flood coverage to homes not covered by regular homeowner policies. NFIP almost went belly-up in 2005 with the $13 billion in flood claims resulting from hurricane Katrina and had to borrow billions from the U.S. Treasury to remain solvent. It is scheduled to end in 2008 and Congress is not keen on making the government shoulder the cost of the next big flood.

The insurance industry is lobbying for its renewal as well as the updating of flood maps and pricing policies based on real market prices. But Congress has other ideas. It wants to include wind damage to policies and extend the length of time for policyholders to file their claims. Some lawmakers are even gunning for retroactive flood coverage for Katrina homeowners – something insurance providers oppose intensely.

Decreasing profits and increasing threats may not be what the P/C industry has been praying for. But a reversal of fortune may actually spur Congress to fast track the two legislations it has been lobbying for. Every cloud does have a silver lining.

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