This article is part of our Rising Star Portfolios series.
I purchased shares of AON
A mean, miserable market
Insurers have slogged through years of dour conditions, and net premiums written have been soft for seven years straight. Measured against GDP growth and inflation, that spells bad news and eventual losses for insurers. The industry just can't sustain that.
Worse yet, industrywide losses from the Japanese and New Zealand earthquakes, Australian flooding, and U.S. flooding and tornadoes, as estimated by Munich Re and NatCatSERVICE, came in at $9.5 billion, the most costly first quarter in 10 years.
In addition, AIG
Now, in addition to all those elements, a bit of new math could give insurers yet another reason to start raising their rates.
RMS 11: This time, it's mathematical
More than two decades ago, a Stanford graduate student named Hemant Shah set out to create a computer model that could quantify catastrophic risk. Today, California-based Risk Management Solutions' models have become the accepted standard in catastrophe modeling for insurers and reinsurers the world over. Insurers aren't obliged to obey RMS' directives, but when the company speaks, they most certainly listen.
RMS recently released version 11, which effectively predicts worse times ahead for hurricane-prone areas: more wind damage, increased losses from storm surges, and more. If insurers and reinsurers heed its advice, they'll plan for larger losses -- and require bigger reserves to offset them.
The industry can't make up that projected gap just by writing more business. Instead, it needs to charge more for its insurance policies.
The model student revolts?
Anyone who's worked with models knows they combine judgment, science, and a little special sauce -- making their outputs sometimes dubious. Many industry insiders are skeptical of RMS 11's assumption; others, most notably XL Insurance of XL Capital
Michael Olsen does not own shares of any of the companies mentioned. He would consider himself fortunate to one day live in an area rated "high-risk" by RMS. The Motley Fool owns shares of W.R. Berkley and Aon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.