Only
9 days after hurricane Frances hit the Florida
region, the region is being threatened by yet another
hurricane, called Ivan.
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As these tropical storms came only a few weeks after
hurricane Charley, the damage could be considerable
and thus also the impact on the insurance industry.
Charley
caused an estimated damage of 6 to 8 billion dollar
of insured losses. Early estimates on the impact of
Frances talk about 3 to 6 billion in insured losses.
Of course, the economic loss is much higher, but some
damages aren’t being covered by the insurance
industry. Frances for example caused substantial flooding
losses, but these aren’t covered. In addition,
the financial impact on insurance companies might
be 1 to 2 billion USD lower given the reimbursement
features of the Florida Hurricane Catastrophe Fund
(FHCF).
But anyhow, the catastrophic events might have a positive
influence on property insurance pricing. After the
9/11 attacks, rates in insurance and reinsurance rose
dramatically, but rather exxagerated. Although there
were no major catastrophes, rates were lifted way
too much, generating huge profits. As a consequence
though, we saw property insurance rates decline during
the last few quarters. Some analysts now think that
the three hurricanes might be a trigger to stop the
recent price pressure and maybe even lift rates in
due course.
Nevertheless, all depends on the level of
losses.
Specialists think that 3 hurricanes that cause damages
of about 6 to 7 billion USD cannot be a trigger for
price increases, as the insurance industry would be
able to
absorb those payments.
But on the other hand, if Ivan would cause a loss
of 20 to 30 billion USD, raising rates becomes probable
as this would imply a shake-out in the sector and
therefore reduce the number of players. Of course
such a major loss would be dramatic for stock prices
in the short run, but industry fundamentals might
improve in the longer term.
Up to now, the impact on the insurance companies within
our stock universe is expected to be subdued. Allstate,
Hartford Financial and St. Paul Travelers will be
the hardest hit; the impact on American International
Group and Chubb will be negligible.
So in conclusion, the hurricanes undoubtedly have
a negative effect on the earnings of the American
insurance companies, but the longer-term effect might
be less negative thanks to regained pricing power.
By Rob Goyens & Gert Biesmans
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