After witnessing a high catastrophe loss (cat loss) activity in the second quarter of 2011, property and casualty insurer Chubb Corp. (CB) is again set to incur further cat losses in the upcoming quarter due to Hurricane Irene, which made its way along the East Coast. Irene is the first major hurricane to strike the U.S. since Wilma in 2005, and the first hurricane of any kind to ravage the country since the Category 2 Ike in 2008.
Chubb’s geographic concentration in calamity-prone areas (the north-eastern U.S) exposes it to cat losses. Chubb, which is an active insurer in the Connecticut area, will expectedly suffer huge cat losses in the third quarter, though the company has not come up with any estimate as yet. The insurance industry has had a bad experience year till date with respect to tornadoes. The first six months of the year clocked an industry loss of $17.3 billion owing to it.
Compared with 2009, the company witnessed less profitable results in 2010 owing to substantially higher cat losses. Similarly, more profit was reaped in 2009 compared with 2008 due to significantly lower catastrophe losses, partly offset by a lower amount of favorable prior-year loss development. The impact of catastrophes accounted for 570 basis points of the combined ratio in 2010 as against 80 basis points in 2009 and 510 basis points in 2008.
Other insurers and reinsurers, likely to suffer cat losses in third quarter, include companies like Allstate Corp. (ALL) and Travelers Companies Inc. (TRV).
However, the high cat activity bears a silver lining for the private industry players who have been suffering from a soft insurance market for the past five years. The storms will provide them a valid excuse to hike premium rates. Insurers are able to increase premiums only after a major catastrophic event as was seen in the years 2004 and 2005. But, ever since the hurricane Ike in 2008, the cat loss activity has subdued, thus rendering the players unable to call for a rate hike. With surplus excess capital and stiff competition, the insurance industry is in a soft phase of the market cycle. Nevertheless, the year’s heavy cat losses points to a reversal in the cycle, which will allow premium rates to increase eventually.
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