Tuesday, May 9, 2017

First Quarter Numbers for Property Insurers Look Bleak, But is it Too Early to Call it a Trend?

The insurance industry has been able, in the past few years, to avoid a string of major catastrophes like those in the early 2000’s.  One might think that property insurers have gotten off easy. Appearances can be deceiving, however, as the industry has been battered by smaller, more frequent, events.  In fact, Fox Business recently reported that the first quarter of 2017 was the most expensive quarter for U.S. property insurers in more than 20 years. The cause for such dreary numbers can be attributed to severe weather—namely tornadoes, flooding, hail, and ice storms. As of early April 6, 2017, there have already been 5 weather and climate disaster events in the U.S., with losses exceeding $1 billion each.  The average for the most recent 5 years (2012–2016) is 10.6 severe weather events per year. In total, it is estimated that insurers have paid approximately $6 billion in weather-related claims so far this year compared to an estimated $4.5 billion as of the same time last year.

It is also worth noting that the first quarter of the year typically yields fewer catastrophe-related damages because hurricane season does not start until the second quarter. However, there were over 400 tornadoes from January through March 2017, compared to 205 during the same period in 2016. When the final tornado count for March is determined, the month will likely rank among the 10 most active Marches for tornadoes. Moreover, hail continues to show that it has devastating economic effects for both commercial and personal lines. 
With more than double the number of tornadoes than in 2016 and an increase in hail claims, insurers are bracing themselves for an increase in weather-related claims as we enter the second quarter.  According to NOAA, the contiguous U.S. had the second wettest April in over 123 years.  Moreover, hail is most likely to fall in the U.S. during the months of May and June. With the hail and tornado season underway and the hurricane season around the corner, weather related-claims should continue to roll in during the second quarter. 
Yet, it may not be all doom and gloom for property insurers, as forecasters are calling for a below-normal hurricane season this year. In fact, only 11 named storms are predicted for the U.S. for 2017. Of these named storms, only four are predicted to become hurricanes and only 2 are predicted to be Category 3 or higher (Category 3 hurricanes have sustained winds of 111 miles per hour.). This is slightly below the 30-year average of 12 named storms and six hurricanes per hurricane season. If these predictions are accurate, insurers will have El Niño to thank, since warmer-than-normal ocean water temperatures in the Pacific Ocean may limit the development of storms in the Atlantic. But as we all know from past hurricanes such as Andrew, Katrina, and Sandy, it only takes one named storm to have significant economic impact on the industry.
Insurers have no choice but to brave the storms to see how the 2nd and 3rd quarter numbers shape up. Mother Nature will always be unpredictable, and she will sometimes be violent. Although storm chasers will keep searching for the next big natural disaster, insurers should keep an eye on the smaller, more frequent, events that can be just as damaging to their loss ratios.  The first quarter 2017 numbers have already told their cautionary tale.

Published by Jennifer Hoffman