Is the insurer stable and dependable?

• Author: Johnson, Chris
• Position: INSURANCE

The commercial property insurance industry finds itself in a precarious position. The year 2010 was one of unprecedented natural disasters around the world. The devastating earthquakes in Haiti and Chile, massive flooding in the United States Midwest and numerous windstorms, volcanic eruptions and landslides resulted in more than $100 billion in economic losses, not counting the human toll.

Quite simply, natural disasters are more frequent: and severe than ever before. (Consider Japan and the recent earthquake and tsunami, which occurred following the research in this report.)

Despite the rising costs associated with these already costly events, insurance rates continue to fall--leaving insurance company balance sheets in relatively good shape. The danger, however, is that these factors create the illusion of good news for insurance buyers when the reality is that the insurance market could be turned upside down by a single catastrophic event.

Why the apparent contradiction? The current economic climate has created a challenging investment environment for many insurance companies. Most publicly held insurers invest in bonds, a stable investment vehicle to build up capital reserves. Unfortunately, increasing prices and declining bond yields are leaving an appearance of surplus in the industry, because bonds are not creating cash flow under...