April 5, 2006 -- The pictures of destruction are all too familiar. Entire cities washed away by the powerful hurricanes that pummeled the U.S. Gulf Coast last fall.
With so much lost to the storms, it would be easy to assume that property and casualty insurance companies -- which insure homes and cars -- took a big hit to their bottom lines in 2005.
But data compiled by the National Association of Insurance Commissioners paints a surprising picture -- one of record profitability for property and casualty insurers amid all the devastation. The group says insurance company filings with all 50 states show an unprecedented $44.8 billion in profits for 2005.
How did this happen in a year that saw three of the most expensive natural disasters in U.S. history? Hurricane Katrina alone caused $40 billion worth of damage, and hurricanes Wilma ($8.4 billion) and Rita ($4.7 billion) caused an additional $13.1 billion in damage, according to the Insurance Information Institute.
A number of factors allowed the industry to come out ahead in a year chock-full of major disasters.
"Most people don't know that insurance companies buy insurance to pass their risks along to other firms," said Robert Hartwig, the institute's chief economist. "About half of the losses for Katrina and Rita were covered by reinsurers -- big firms based in Europe and Bermuda who assumed some of the risks for U.S. insurance companies. They obviously came out on the losing end of those policies last year."
Other Areas of the Country Unharmed
Another factor helping profits for the property and casualty industry -- smaller losses in areas away from the Gulf Coast.
Hartwig points out that the insurance business is not really national. It is regulated by the states, and products have to be financially sound on a statewide basis. Disasters in Louisiana, Mississippi and Alabama do not mean losses for insurers in Ohio, California or Colorado.
Fewer losses and higher premium revenue in markets outside the Gulf Coast were a healthy counterbalance to the hurricane-prone Gulf.
In the areas hit hardest by Katrina and Rita, insurance companies were shielded from a direct blow by the government-run National Flood Insurance Program. Losses from flooding, like those suffered when levees broke in New Orleans, are not covered by private insurers.
Experts also suggest that the insurance industry is seeing healthier returns on its investments than it has in the past. A red-hot energy sector and new investment vehicles like hedge funds are making the insurance reserve funds grow at a faster pace.
Even with record profits in 2005, the industry is bracing for what experts say could be another nasty year of hurricanes and other natural disasters.
Forecasters say the next decade will see a continued rise in the number of powerful hurricanes, and that means higher payouts and premiums for the industry.