Bannister & Associates

Disasters, both natural and man-made, as well as mold, construction defect and a recent hard market have impacted the U.S. economy and the insurance industry as a whole, according to a leading property/casualty economist.

Looking at trends and challenges in property insurance business today, Robert Hartwig, senior vice president and chief economist with the Insurance Information Institute (I.I.I.), said that catastrophes have had a significant impact on underwriting performance and profitability but had no substantive impact on capacity. "That's because the industry's need and ability to raise capital increases following mega-disasters," he said. "Inflow masks destruction of capital."

Hartwig, who spoke at the Institute for Business & Home Safety Congress at the Coronado Springs Hotel in Orlando, Fla., said that catastrophe losses have had an impact on insurers.

"Since 1990, insurers have paid more than $700 per month in CAT-related losses. "In 2003 we have paid nearly $12 billion in insured losses. The California wildfires, for example, are the fourth billion dollar plus event of 2003."

Hartwig said that a total of 1,005 major disasters have been declared by the federal government since 1977. "The average annual figure in 2002/2003 is double the 25 annual average of the 1980s. Texas, California, Florida and Louisiana are four of the top 10 states that have had major disasters since 1972."

One of the largest disasters was Sept. 11, with total economic losses to New York City at $83 billion. "There is no doubt, insurers rebuilt this city," said Hartwig. "Post 9/11, insurers will have paid out nearly $40 billion. Private insurance is, by far, the best recovery option for individuals and businesses following a disaster."

According to Hartwig, average homeowner expenditures are expected to rise by eight percent in 2004. He cited enormous underwriting losses as the primary reason. "The frequency and severity of these disasters have put a lot of pressure on this line of business," he said.

"Record new home construction, a trend toward larger, more expensive homes, home price inflation and home improvements have all been revenue growth drivers. Insurers have paid out an average of $1.16 in losses for every dollar earned in premiums over the past 13 years."

In addition to disasters, new issues such as 'toxic mold' cost billions of dollars and no prior premium was collected, Hartwig said. "Litigation is a problem as is falling capacity and rising reinsurance costs."

While mold losses and claims in the Texas homeowners market are finally moderating, Hartwig noted that there has been a migration to commercial property. "The commercial area affects many lines including commercial liability, commercial property, workers' compensation, product liability, builders risk and construction defect."

Hartwig outlined the next battlefields for mold being apartments, condos, coops, schools, officer structures, municipal buildings and even cars.

"There is a trend toward class actions since science doesn't support massive individual, non-economic damages," he said, adding, "It is much more lucrative for trial lawyers to form a class action."

Hartwig said that construction defect is also becoming a major issue for insurers. "A growing number of lawsuits target builders, contractors, developers, sub-contractors, architects, engineers, even material suppliers and product manufacturers."

He said that hot spots included California, Nevada, Colorado, Texas, the Carolinas, Florida and New York. "Construction defect litigation is destroying the California condo market," said Hartwig. "Insurer costs rose 58 percent in just two years and condo construction in parts of California has come to a virtual stop."