Why Insurance Rates are Rising?
v 2011 was the highest loss year on record for economic losses globally. Extraordinary accumulation of severe natural catastrophes; earthquakes, tsunamis, floods and tornadoes were the primary causes of loss.
v $35.9 billion in insured losses in the United States arose from 171 declared catastrophe events. This was the fifth highest year on record. This represented a 51% increase over the $23.8 billion total in 2010. Approximately 50% of the overall costs of catastrophes in the US were covered by insurance in 2011.
v In 2011, catastrophe losses accounted for 9% of the combined loss ratio. This was the highest percentage ever recorded. These results by averaged for each decade show miniscule loss component percentages from catastrophes as compared to 2011. (1960’s = 1.04%; 1970’s = 0.85%; 1980’s = 1.31%; 1990’s = 3.39% and 2000’s = 3.52%).
v The Property and Casualty industry 2011 third quarter profits were 71% lower compared to the same period in 2010. Return on Equity of 5% and 5.6% in 2009 and 2010 was at 1.9%.
v The ten year cycle of historic high Returns On Equity shows it will reoccur in 2016-2017 as the last peak was in 2006. Traditionally, 5 years after the highest returns, or 2011, the lowest ROE results occur. That is what happened last year. Traditionally immediately following low returns significant rate increases develop. The insurance industry is now at that point.
v Through the third quarter of 2011 rates have begun to move upward. Property lines are showing larger increases than Casualty lines, with the exception of Workers Compensation. In 2011, growth in personal lines net written premiums have increased 3.1% and in commercial lines increased 3.9%, illustrating some rate increases have already begun.
v The number of years that the industry showed a true underwriting profit has been only 3 since 1980. The difference in 2011 was the lack of investment opportunities, which in the past have counter balanced the lack of true underwriting profits. Yields on 10 year US Treasury Notes have been below 4% since January 2008.
v Historically a hard market (rate increases) follow when surplus growth is negative. Surplus growth was positive until the first quarter of 2011 when it began to trend downward and continues to do such.
v All of the criteria necessary for a market turn (rate increases) now exist.
o Sustained period of Underwriting losses – 2011 showed the highest industry combined ratios of 108.2% since 2001.
o Material decline in surplus capacity – Surplus fell 4.6% through September of 2011.
o Tightening of Reinsurance markets – Much of the global excess capacity has been eroded by the catastrophes. Higher reinsurance pricing for US risks begun with the January 1, 2012 rate indicators.
o Renewed Underwriting & Pricing Discipline – Lower investment earnings places a greater burden on Underwriting and Pricing Disciplines.
Allwood-Forlenza-Agency
482 Notch Road Woodland Park New Jersey 07424
973-256-5500
