2006 Hurricane Risk Case Study Essay

Topics: Insurance, Types of insurance, Risk Pages: 5 (1666 words) Published: July 26, 2010
1. How profitable are property and casualty insurance companies? Answer: Property and casualty insurance protects property (houses, cars, boats, and so on) against losses due to accidents, fire, disasters, and other calamities. Property and casualty policies tend to be short-term contracts and, that’s why the subject to frequent renewal is, and one more characteristic feature is the absence of savings component. Property and casualty premiums are based on the probability of sustaining the loss. To estimate the key determinant of the price of an insurance policy, i.e. risks, insurance companies take third-party proceedings that develop models of catastrophe loss probabilities. Based on the numbers form Exhibit 5 of the case we see that according to AIR Worldwide which provides information on the loss probability that Insured Loss if the listed Hurricanes Recurred in 2006 is 151.2% more than the case writer estimates of Actual Reported Damage in 2006. As you see from the table below differences in monetary terms and percentage change between these two different sources are huge except those figures with minus sign. So, we can say that prices are not fixed and depend on the third-party vendors’ probability calculations which are much higher than actual estimates suggested by casewiters. Consequently, the profits of property and casualty insurance companies can be high. [pic]

* Casewriter estimate
** Source: AIR Worldwide
Besides, Reinsurance may reduce their risk exposure by allocating a portion of the risk to another company in exchange for a portion of the premium. Reinsurance allows writing larger policies because a portion of the policy is actually held by another firm. Also, profits of these companies strongly depend on unforeseen risks due to unpredictable nature of accidents, fire, natural disasters like hurricane, tsunami, etc. However, from the Exhibit 7 of the case we see that Investment Income is vitally important to continue operations of property-casualty insurance companies. To see the importance of the income from these companies’ investments and to see how it affects Net Income we put zero in the line on Investment Income holding other numbers constant (based on Exhibit 7: Income Statistics): [pic]

We see that without property-casualty companies’ Investment Income the Net Income is negative. So, we can say that Insurance Losses is offset by Investment Income from which these companies only gain. 2. Purchasing insurance: what should Joe Martinez do?

Answer: According to the statistical data in the Exhibit 1 (see the 2006, Hurricane risk case study) about the frequency of US Hurricanes by state of Landfall (1900-2004), we can say that, unfortunately the most frequent hurricanes happened on the Southeast of US, especially in Florida. But the most of them have only 1-3 categories. This means that hurricanes may cause damages trees, shrubs and average damage to the building. There was only one hurricane in the Florida, which had 1st category and seven of them had 4th category. The problem of Joe Martinez is that insurance rates are on the rise. These increases have been driven by a combination of higher than expected hurricane-related claims as well as increased costs related to reinsurance (i.e., insurance sold to other insurers to mitigate the risk of losses). Beyond this, the recent economic turmoil has put additional strain on insurance companies, resulting in pressure to increase premiums. The bad thing is that Joe Martinez might be in need of hurricane protection. From the case, we know that his house near the beach and it was no match for direct hit from hurricane, and this is good thing. But there is a high probability that the hurricane will destroy or damage his house at the next time. In many cases, the damage caused by hurricanes will be covered by basic homeowner’s insurance policy. An increasing number of policies actually exclude hurricane-related damage, in which case...
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