Are Two Small Disasters Better Than One Big One?

In the middle part of the United States we have frequent “Cat” losses due to wind storms, hail and the like.  While these get brief and histrionic media attention, the real TV news bonanzas seem to be the huge storms like Sandy.  But, from an insurance company point of view, which is worse?

You probably know that insurance companies buy insurance to protect themselves against catastrophic claims created by huge weather events.  These “reinsurance” policies have deductibles too.  They are measured in millions or tens of millions of dollars depending on carrier size and risk appetite. 

So, are two small disasters better or worse than a big one?  In the case of Sandy, all carriers who buy reinsurance got to lay off some of their losses on others.  So, at the end of the day while a carrier may have looked like they took a beating, they probably ended up like the homeowner with a percentage deductible on his roof.  It was painful but not ruinous.

BUT!  Small disasters, like small homeowners claims, often don’t exceed the deductible.

And in some cases the potential fallout from these small disasters can be very, very dramatic.  I recently talked to representative of a fairly large, very well-known insurance company who suffered two significant catastrophic events that where just below their reinsurance threshold.   I was told that just one more would have eroded their surplus to insolvency! 

So, just like with the book of business in your agency, or a customer’s loss run, frequency of claims (especially coupled with some severity) can be a killer of insurance companies.   Even when it doesn’t kill them though it darn sure makes them sensitive to additional losses!

All companies, whether as threatened as the one I mentioned, have had negative results from severe “catastrophic” claims in recent years.  This coupled with the lagging economy and poor investment climate has put tremendous pressure on them to produce profits.

The result?

Higher premiums of course.  But no new agency appointments.  Increased scrutiny of agency performance.  Cancellation of agency contracts.

At OAA, we are working harder than ever to support our members as we weather the storm.  And we are growing with all of our companies despite their issues.  We have room for other likeminded agents who are committed to writing quality business.  So, if you need help, give us a call.