Shaping the Future of the Insurance Industry: The Role of Catastrophe Losses

Impact on Underwriting Practices and Policies

Insurers are enhancing risk selection, reducing exposure to catastrophe-prone areas, and maintaining underwriting restrictions to manage catastrophe risks. They are also demonstrating underwriting discipline by pulling back on unprofitable lines and improving segmentation to mitigate the impact of catastrophe losses on underwriting practices and policies.

"Focus on enhancing risk selection, driving consistent underwriting best practices and building robust monitoring standards to improve underwriting results. COMPETITION AND CHALLENGES" --- (AIG, sec filing, 2024/Q1)

"business market targets. While our other three BMTs are growing year-over-year from both a unit and premium perspective, in property, we continue to execute on our strategy to reduce our exposure to catastrophe prone states, grow in states that have less volatile weather profiles and improve the underwriting and segmentation of our products." --- (PGR, earning call, 2024/Q1)

"The higher underlying underwriting margins primarily reflected the impacts of (i) higher business volumes and (ii) the comparison to an elevated level of losses in the prior year quarter from a small number of surety accounts, partially offset by (iii) higher general and administrative expenses." --- (TRV, sec filing, 2024/Q2)

"On your annual shareholder letter right, you talked about the willingness to pull back on unprofitable lines, a demonstration of underwriting discipline." --- (CB, earning call, 2024/Q1)

"And in those two states, in particular, we have not lifted any of the underwriting restrictions that we have in place. Greg Peters: Got it. Thank you for the detail." --- (ALL, earning call, 2024/Q1)

Risk Management Strategies in Response to Catastrophe Losses

Insurance companies are enhancing risk management strategies by improving loss ratios, refining risk selection, and leveraging catastrophe reinsurance programs. Accurate loss reserve development and proactive adjustments to catastrophe risk models are crucial for maintaining financial stability and profitability in the face of potential future catastrophes.

"The improvement was mostly driven by a decrease in loss ratio, reflecting lower catastrophe losses and favorable development in PYD, net of reinsurance, compared to unfavorable development in the prior year quarter, as well as a 0.4 point improvement in expense ratio to 29.5%." --- (AIG, press release, 2024/05/01)

"As we saw five years ago, when we were the first to call out a change in loss levels tied to an increase in attorney rep rates, sharpening our view of loss costs early in the development of immature accident years and long tail lines positions us to enhance our risk selection, pricing, and claim strategies, ultimately setting us up to outperform in terms of growth and profitability." --- (TRV, earning call, 2024/Q2)

"Changes in our estimate of our ultimate losses on catastrophes currently reserved, along with potential future catastrophes, could have a material impact on our financial condition, cash flows, or results of operations." --- (PGR, sec filing, 2024/Q1)

"Our current catastrophe reinsurance program supports our risk and return framework which incorporates our robust economic capital model and is informed by catastrophe risk models including hurricanes, earthquakes and wildfires and adjusts based on premium and insured value growth." --- (ALL, sec filing, 2024/Q1)

"Loss reserve development The increase or decrease in incurred losses and loss adjustment expenses related to prior years as a result of the re-estimation of loss reserves at successive valuation dates for a given group of claims." --- (AIG, sec filing, 2024/Q1)

Financial Performance and Profitability Impact

Strong underwriting performance and low catastrophe losses have bolstered profitability for AIG's General Insurance. Progressive focuses on improving profitability and reducing exposure. Allstate highlights industry efforts to return to profitability by managing loss costs. Travelers' core income rose, though higher catastrophe losses partially offset gains.

""General Insurance had another quarter of impressive Commercial Lines profitability benefiting from continued strong underwriting performance and low levels of catastrophe losses as we continue to manage volatility in our results."" --- (AIG, press release, 2024/05/01)

"Improving profitability and reducing concentration exposure continued to be the top priority for our Property business during the first quarter 2024." --- (PGR, sec filing, 2024/Q1)

"So the industry was able to accomplish that to get back to profitability. I think the thing I would look for is the difference between the increase in loss costs and" --- (ALL, conference, 2024/06/05)

"Core income of $585 million increased $570 million, primarily due to a higher underlying underwriting gain, higher net favorable prior year reserve development and higher net investment income, partially offset by higher catastrophe losses." --- (TRV, press release, 2024/07/19)

"Only one? Yes, you only get one. And it will be hard for you. Okay. It'll be underlying profitability including cap Because it's like it's you premium out the door to us and then you got losses going out to pay losses and we want to drive profitability in the company." --- (AIG, conference, 2024/05/29)

Regulatory Changes and Compliance Requirements

Travelers highlights that regulatory changes, including higher tax rates, and the effectiveness of compliance controls are critical concerns. The company is heavily regulated, and any changes in regulation could impact profitability and growth, emphasizing the importance of robust compliance mechanisms.

"Regulatory and Compliance Risks changes in regulation, including higher tax rates; and the Company's compliance controls may not be effective." --- (TRV, press release, 2024/07/19)

"Regulatory and Compliance Risks changes in regulation, including higher tax rates; and the Company's compliance controls may not be effective." --- (TRV, press release, 2024/04/17)

"Regulatory and Compliance Risks • the Company’s businesses are heavily regulated by the states and countries in which it conducts business, including licensing, market conduct and financial supervision, and changes in regulation, including changes in tax regulation, may reduce the Company’s profitability and limit its growth; and • the Company could be adversely affected if its controls designed to ensure compliance with guidelines, policies and legal and regulatory standards are not effective." --- (TRV, sec filing, 2024/Q1)

Role of Reinsurance in Managing Catastrophe Losses

Reinsurance plays a crucial role in managing catastrophe losses by setting risk limits, purchasing catastrophe reinsurance, and using innovative solutions like catastrophe bonds. This ensures sufficient liquidity, capital, and appropriate risk-adjusted returns, while also helping to estimate and manage ultimate losses from significant catastrophes.

"Catastrophe Management We actively monitor and manage our catastrophe risk accumulation around the world from natural perils, which includes setting risk limits based on probable maximum loss (PML) and purchasing catastrophe reinsurance to ensure sufficient liquidity and capital to meet the expectations of regulators, rating agencies, and policyholders, and to provide shareholders with an appropriate risk-adjusted return." --- (CB, sec filing, 2024/Q1)

"For purposes of the table, a significant catastrophe is an event for which the Company estimates its ultimate losses will be $100 million or more after reinsurance and before taxes." --- (TRV, sec filing, 2024/Q1)

"If the amount of premium paid by the ceding reinsurer is less than the related ceded loss reserves, the resulting gain is deferred and amortized over the settlement period of the reserves." --- (AIG, sec filing, 2024/Q1)

"Critical Accounting Estimates Unpaid losses and loss expenses As an insurance and reinsurance company, we are required by applicable laws and regulations and U.S. GAAP to establish loss and loss expense reserves for the estimated unpaid portion of the ultimate liability for losses and loss expenses under the terms of our policies and agreements with our insured and reinsured customers." --- (CB, sec filing, 2024/Q1)

"Catastrophe Bonds. Consistent with the Company’s indemnity reinsurance agreement with Long Point Re IV Ltd., the attachment point and maximum limit were reset during the second quarter of 2024 to adjust the expected loss of the layer within a predetermined range." --- (TRV, sec filing, 2024/Q2)

Customer Impact and Market Competition

Allstate and Travelers highlight their leadership and competitive advantages, which they believe will drive growth and customer retention. However, Chubb notes a significant increase in business insurance costs, impacting SMEs. Travelers also emphasizes product modernization to enhance customer appeal, reflecting the dynamic competitive landscape.

"And the combination of relatively speaking low competition that we have seen in the market and our leadership position should hopefully allow for that going forward." --- (ALL, Investor Day, 2024/06/25)

"It's Alan. I'll start and then turn it over to Greg. Hard for us to comment for competitors, but we do think that in the pricing we've been able to achieve with these retentions, you do see a reflection of the competitive environment." --- (TRV, earning call, 2024/Q1)

"40% increase for our business insurance. Another one of the death by 1000 cuts SME's in the UK experience." --- (CB, Twitter, 2024/07/04)

"Combined with the competitive advantages such as our relationship with customers, superior commercial execution, we see continued opportunities for growth from both organic and inorganic opportunities across all three businesses." --- (ALL, Investor Day, 2024/06/25)

"Both product launches mark further progress on our journey to modernize our products and platforms, making us an even more compelling choice for customers and distributors." --- (TRV, earning call, 2024/Q1)