Property and casualty (or P&C) insurance companies help to protect policyholders from liabilities and damage to personal possessions. AIG (AIG), ACE (ACE), Travelers (TRV), and Chubb (CB) are key players in the P&C space.
Catastrophe losses are one of the key risks to P&C insurers because these losses negatively impact profitability and capital. In this series, we will take a closer look at how catastrophes impact P&C insurers and their investors. We will also consider recent occurrences of catastrophes worldwide and assess how insurers and reinsurers are sourcing capital from non-traditional channels in order to increase capacity.
In the P&C insurance business, catastrophes constitute infrequent events that cause large losses through damage to property and other objects. Normally, a single catastrophe’s losses would total more than $25 million. However, definitions may vary from company to company. The chart above shows the rise in the number of catastrophes in recent decades.
Catastrophe losses are problematic for insurers like those held by the Financial Select Sector SPDR ETF (XLF) and the iShares Dow Jones US Financial ETF (IYF). These events are not predictable, so insurers must have sufficient capital to pay policyholders when sudden and large claims arise.
Furthermore, catastrophes directly impact a P&C insurer’s profitability. Large losses generally exceed the pricing assumptions and may result in higher expenses compared to revenues. In the next article, we’ll take a closer look at these issues.