Since most of the property and casualty insurers, adversely
affected by the Hurricane Sandy, have provided their initial loss
estimates for the fourth quarter of 2012, we can fairly classify
the loss caused by the storm as an earnings event rather than a
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By earnings event we mean that the losses due to Sandy will hit
insurers' fourth quarter earnings, but will not significantly
erode their capital position. Insuers such as
The Travelers Companies Inc.
XL Group plc
Tower Group Inc.
), who had high exposure to the Sandy-affected areas, suffered
losses to the extent of 0.9%-2.0% of their shareholders' equity.
In total, loss from Sandy is pegged at approximately 3.9% of the
available industry surplus.
Despite being known as the third most expensive hurricane in the
U.S. history in terms of insured losses, with up to $25 billion
in claims paid, ranking only behind 2005's Hurricane Katrina
($48.7 billion) and 1992's Hurricane Andrew ($25.6 billion),
Sandy has failed to qualify as "catalyst" for improving insurance
pricing. However, it can impact the insurance and reinsurance
prices in some of the affected areas - Northeast/MidAtlantic.
While the record cat loss in 2011 caused industry underwriting
loss of $36.5 billion and induced pricing to improve in many
non-life insurance segments, a broad-based hardening of rates was
nowhere to be seen. Further, lack of substantial losses in 2012
has narrowed underwriting losses to $7 billion in the first half
of 2012 from an underwriting loss of $24.1 billion a year ago.
The combined ratio - a key measure of losses and other
underwriting expenses per dollar of premium - improved to 102.2%
in the first-half 2012 from 110.5% in 2011.
Owing to surplus capital, carriers have been increasing share
repurchases and dividend payments. Going forward, the
continuing low interest rate through 2014, which will keep
investment income under pressure along with drying up of excess
reserve release, will drain the capital position of the insurers,
forcing them to recheck their pricing policy.
Currently, the prices have stopped softening and these have yet
to witness a change across the regions as well as business lines.
Moreover, the magnitude of price rise remains small. A thorough
study of the insurance market points toward a typically mature
soft market cycle, but this cycle is likely to take more time to