The insurance industry was uneventful for several quarters until calamities ravaged the second quarter of 2016. The quarter witnessed varied catastrophes, including a wildfire in Canada, flooding in Europe, earthquakes in Japan and Ecuador, and hailstorms in Texas.
A report by Munich Re says that U.S. economic losses caused by natural catastrophes in the first half of 2016 were $17 billion compared with $12 billion in the year-ago period. Insured losses due to natural disasters in the United States in 2015 totaled $16.1 billion, more than $15.3 billion incurred in 2014.
Approximately $12.3 billion ($8.8 billion insured) of this was due to a series of storms in Texas and the neighboring states, including destructive hailstorms in Dallas and San Antonio, and severe flooding in the Houston Metropolitan area.
Allstate Corp. (ALL - Analyst Report
) has already announced that it expects to incur catastrophe loss of $154 million, pre tax ($100 million after tax) for the month of Aug 2016 and $253 million, pre tax ($164 million after tax) for the month of Jul 2016. These losses accrue to 10 events occurred in August and 16 events in July.
The occurrence of hurricane Matthew in Florida in October will once again cause severe loss of properties. The category 4 hurricane which has been described dangerous by the hurricane centre might cause loss to companies like American International Group Inc. (AIG - Analyst Report
) , Progressive Corp. (PGR - Analyst Report
) and Chubb Ltd. (CB - Analyst Report
) operating in Florida. Reinsurers, RenaissanceRe Holdings Ltd. (RNR - Analyst Report
) and Validus Holdings Ltd. (VR - Snapshot Report
) present in the region are also likely to suffer. While the exact damage caused cannot be calculated now, potential losses are feared to be as high as $15 billion.
Though companies are focusing on reducing losses through its catastrophe management strategy and reinsurance programs, while maintaining its underlying combined ratio, we cannot rule out the possibility of significant losses from catastrophes and severe weather incidents, going forward.
While high catastrophe dents the industry's margins and causes a spike in combined ratio which causes underwriting loss, it also acts as a catalyst to the insurance pricing cycle. In recent years, the industry has amassed ample reserves owing to low catastrophe losses which led to loose underwriting standards with companies trimming their insurance prices. This has resulted in stiff competition and pricing woes in the industry. Huge catastrophe losses could now come as a blessing in disguise by denting capital and forcing companies to practice disciplined underwriting by hiking premium prices. This should eventually lead to a hard insurance cycle.
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