There has been no end of bad press for the property and casualty insurance industry this month. Allegations of price gouging, faulty catastrophe models and calls for a congressional probe into post-Katrina hurricane claims flooded the news wires.Most of the negative press pointed a finger at an odd coincidence. First, the year after more than 993,000 homeowners' insurance claims were settled in the two states most affected by Katrina and, according to the Property Casualty Insurers Association, Des Plaines, Ill., the insurance industry paid $51+ billion in overall catastrophe-related claims. Then, the industry experienced a relatively catastrophe-quiet-and profitable-year.
The "quiet year affect" is at least partly responsible for netting the industry a $24.4 billion net gain on underwriting through the first nine months of 2006 (as compared to the $2.5 billion net loss for the same period in 2005), and an increase in its net income after taxes to $44.9 billion in nine-months 2006 from $29.7 billion in nine-months in 2005. All in all, combined ratio improved 8.4 percentage points to 91.5% in the first three quarters of 2006 - from 99.9% in the first three quarters of 2005.
This begs the question: As an industry, are we getting smarter about how we manage risk, or did the surprisingly calm winds result in our getting lucky?
The answer may be a bit of both.
Many larger carriers are replacing core systems such as underwriting, claims and policy administration with advanced technologies that enable them to price and manage risk more accurately. But the results of these large system replacements, which most often require more than a year just to implement, are not necessarily detected on a company's EBITA within one fiscal year. Rather, the trickle-down effect of any gains from improved underwriting practices will be felt in the long term.
As for the impact of the weather, some larger carriers walked away from new business along the coast, and many smaller carriers simply couldn't compete after Katrina, therefore no longer contributing to the industry's combined ratio results.
Of course, there will always be companies in our industry that contribute to negative public perception by taking undue advantage of claimants and boosting premiums to extravagant levels.
But technology, the weather and unjust business practices are only part of a very large, complicated picture; they reflect the notion that there is absolutely no single, simple answer to our industry experiencing one profitable year.
One thing is clear, however; our industry needs to do a better job of educating the masses about its business processes, business cycles, and the veracity of fair and equitable business practices being conducted by most insurance companies.
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