January 07, 2008
Overall, 2007 was a good year to be in the insurance industry. Most companies have done well for themselves and strengthened their financial positions. Here’s a recap of some of the biggest events (or non-events) from 2007.
1. Climate Change
2007 marked a turning point on climate change..the insurance industry realized it could hit their bottom line!
Munich Re and Swiss Re have entire departments dedicated to assessing the impacts. Lloyd’s 360 Project recently analyzed the phenomenon. Their actions are driven by the realization that unchecked global warming could eventually wipe out the industry
2. Hurricanes? What Hurricanes?
Despite some deadly storms — Dean in August, Felix in early September and Noel in October — no serious hurricane struck the United States in 2007. As a result, insurance company balance sheets are flush at year’s end, calls for premium reductions have increased. Such short-term memory loss could be a mistake.
3. Soft Market … Everywhere
The soft market catapulted into full swing in virtually all lines of insurance in 2007. Insurance has been traditionally manic-depressive; cut rates and increase risk one year, raise rates and get off risks the next. For now consumers can enjoy the lowering rates and easing of underwriting requirements.
Commercial premium rates declined 11.8 percent on average for all sizes of accounts, while personal auto insurance increased just 0.4 percent during the first-half 2007 compared with its level a year earlier. Similarly, despite ongoing problems in some coastal property insurance markets exposed to hurricanes, the property insurance rose just 0.8 percent through June 2007. In the face of the soft market, insurers are still reporting strong underwriting results, in large part because no serious hurricane struck the United States in 2007.
4. Subprime Mortgage Credit Crunch
Over the last five years a combination of rising house prices and clever financial innovations, led mainly by investment banks and hedge funds, fundamentally altered the way home mortgages were structured. Home loans were “packaged” into investment vehicles — CDO’s (commercialized debt obligations), SIV’s (structured investment vehicles), etc., and sold on to investors. Despite the fact that no one really knew what had been “packaged,” the rating agencies considered them as low risk securities, often rating them triple “A.”
Is the insurance industry affected? Ask Swiss Re, who wrote off close to $1 billion in a “mark-to-market loss,” (Enron accounting I call it) arising from its exposure to two credit default swaps. In addition to direct loss exposures, the insurance industry depends on the credit markets for short-term cash needs. The crisis continues to make commercial paper harder to obtain and more expensive. The industry also faces potential directors and officers liability insurance claims from investors targeting the banks and other financial institutions that packaged and sold the original securities. Finally, some fear the crisis could precipitate a global economic recession.
5. Terrorism Coverage
Just two weeks before the end of the year, and the fate of the federal terrorism insurance program was still unknown. But on Dec. 26, just two days before Congress adjourned for 2007, President Bush signed legislation that reauthorizes the federal backstop for seven years.
6. Fires and Floods
As of the first week in December no Katrina, tsunami, earthquake or similar disaster has occurred. However, there were a number of “lesser” events. Fires in California destroyed more than 2,500 homes, severe storms and flooding struck Washington state in early December and hurricanes ravaged Haiti, Southern Mexico and Central America. The worst floods since 1947 hit the United Kingdom in June and July causing an estimated $4 billion in insured losses. Windstorm Kyrill roared through Holland, Germany, Denmark and on into Eastern Europe leaving around $4 billion in insured losses in its wake.
On a personal note, I had a major fire in one of my rental properties. I tried blogging about it but it was too long term (and depressing).
How about your year? Hopefully uneventfully.
