Back to February 2006 home page

2006 industry report: insurance

Storms cause insurers to seek higher ground

Premium notes

TREND: A growing belief that hurricanes are becoming more fierce and frequent. Big storm-related losses in 2005 caused some companies to rethink their underwriting guidelines.

OUTLOOK: Some may reduce their concentration of risk on the coast.

North Carolina was spared a direct hit from hurricanes Katrina and Rita. But like Gulf Coast residents in the path of the storms, some Tar Heel insurers had a big mess to clean up afterward. Chapel Hill-based James River Group, a property-and-casualty company, blamed third-quarter losses of $9.5 million — compared with a $3 million profit in the same period of 2004 — on payouts to Katrina and Rita victims.

The storms forced James River to buy more reinsurance — insurance for insurers — to guarantee it can pay future claims. It also quit writing policies temporarily and revised its underwriting guidelines. James River wasn’t alone in its soul searching. “A number of companies following the 2005 storms decided to take a hard look at their underwriting guidelines and how they employ models to inform them about what their total exposure might be given a particular storm or weather event,” James River CEO Adam Abram says.

Eric Goldberg, an assistant general counsel with the American Insurance Association, says the big question for regions not directly hit by hurricanes is whether the cost of reinsurance will go up. That probably won’t be determined until years pass and scientists know whether the heavy storm season in 2005 was part of a trend.

But many insurers already are treat- ing it as just that. “There are a number of people who believe that the frequency of storms might increase and that the intensity of storms might increase as well,” Abram says. “There are much higher values near the coast. That would cause insurance companies to take a hard look at the concentration of risk that they have.” Home insurers already had raised their rates by as much as 15% in coastal regions, with smaller increases elsewhere, the month before Katrina.

Other sectors had problems, too. As the year closed, auto insurers were locked in their annual tussle with state Insurance Commissioner Jim Long, requesting an 11.5% increase. In 2004, the industry had agreed to no change in premiums after initially requesting a 12.3% increase, and Long’s office negotiated a 15% decline in 2003. No decision had been made on the latest rate request by late December.

Profits are falling at Chapel Hill-based Blue Cross and Blue Shield of North Carolina, the largest health insurer in the state. Net income slipped 8% to $133.3 million in the first nine months of 2005. Blue Cross has been under pressure from critics, some in the General Assembly, who say the nonprofit has been making too much money. But the insurer warned in August that an increase in medical costs — up 14% to $1.4 billion for the first six months of the year — could force it to raise premiums.

Profits for health-maintenance-organizations dropped across the board. For the first six months of 2005, profits at United HealthCare of North Carolina, the state’s biggest HMO, fell 14% to $16.2 million, while profits at Blue Cross’ HMO fell 56% to $6.1 million.

Chapel Hill-based Investors Title, which is tied closely to the real-estate market, began preparing for the effects of higher mortgage rates. The average rate of a 30-year fixed mortgage hit 6.35% in September, nearly a full percentage point higher than the average for June, and new-home sales dipped slightly. So far, it hasn’t mattered: Investors Title’s net income for the first nine months of 2005 increased 21% to $9.8 million. Even so, it now offers trust services to offset any cooling of the housing market.

Tar Heel life insurers reported strong sales in individual and group life-insurance coverage, but the dominant company is cashing in its policies. Greensboro-based Jefferson-Pilot — the largest North Carolina-based life-insurance company — announced plans to sell itself in March to Philadelphia-based Lincoln National for $7.5 billion. The state will lose a Fortune 500 headquarters, but company executives say employment in Greensboro will increase.