Insurers Will Bounce Back from Sandy

Insurers won't endure too much pain from Sandy, and this may even present an opportunity for firms to raise prices

Drew Woodbury 31 October, 2012 | 3:13PM

The worst of the Sandy storm seems to have passed, and now it appears that the impact on insurance companies will be less than feared.

Initial tallies from risk modelers such as Eqecat place the estimate for insured losses due to Sandy at somewhere between $5 billion and $10 billion. This figure is less than half of the estimate for total losses, which currently stands at around $20 billion, since most of the losses will be caused by flooding. Flood insurance is not covered under standard private insurance contracts but rather is administered by the US government under the National Flood Insurance Program.

These estimates are still preliminary and will undoubtedly be revised as the situation develops and claims begin to flow in, but based on current information, we do not expect to make changes to the fair value estimates for any of the insurers we cover in light of the storm.

While the losses will be material for many of the property and casualty companies we cover, the current year has been relatively benign for losses and, as a consequence, the industry has significant capacity to pay claims. Insurance is a volatile business, and paying claims for occasionally large losses is part of the natural course of business for these companies.

Additionally, to the extent that the storm reduces capital from the industry, it could help harbour a more broad increase in prices. In the most recent quarters, many insurers have been noting mid- to upper-single-digit price increases, which may be indicative of the beginning of an improving pricing market. Ultimately, a large loss event may help drive a change in industry behaviour, which could usher in a more widespread hardening market.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Drew Woodbury  Drew Woodbury is an equity analyst covering insurance companies.

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