Paper Questions U.S. Coastal Property Insurance Sustainability

Chris Westfall
Chris Westfall

It will take several low loss years for property insurers to sustain profitability and even that will not guarantee the industry’s long term viability, according to a new academic paper.

With the cost of capital rising and regulators capping rates, property insurers may end up determining that catastrophe coverage is an uninsurable risk on the U.S. coast.

“The viability of property insurance markets will depend on evolving risk conditions and states’ regulatory policies,” says a paper from Wharton University’s Risk Management and Decision Processes Center. “Recent developments and evolving conditions will have significant implications on the reliance on private insurers and the need for greater government intervention with respect to property coverage.”

Profits from insurers that currently offer coverage in the hurricane prone regions of the U.S. have been declining for decades, according to the paper. Insurers’ profits on a cumulative basis have been negative in the U.S. Southeast since 1985.

At the same time state regulators have been fighting rate increases. The paper points out that Florida has significantly limited rate increases since 2006 and limited insurers’ efforts to reduce their exposures to catastrophe losses.

“[M]any insurers will likely continue to view their situation as tenuous until their long‐term profits approach a level that is more consistent with their cost of capital,” according to the paper.