The companies that provide Americans with their homeowners and auto insurance made a record $44.8-billion profit last year even after accounting for the claims of policyholders wiped out by Hurricane Katrina and the other big storms of 2005, according to the firms' filings with state regulators.
Top executives described the profit -- an 18.7% increase over the previous year -- as a fluke, the product of gains in other lines of insurance besides homeowners and a very good year for their investments.
They said that even with the increase, insurers face deep problems that can be fixed only by substantial premium hikes, a scaling back of commitments by several firms to the most disaster-prone portions of the country and, according to some, a greatly expanded role for the state and federal governments in insuring individuals against the largest of catastrophes.
"Unless insurers can get relief, you're going to see a pullback by the private industry," warned Robert P. Hartwig, chief economist of the industry-funded Insurance Information Institute.
"We're not being good stewards of our investors' capital or our policyholders' surplus if we keep doing business where we can't make money."
In fact, the property casualty insurance industry, which provides homeowners and auto coverage, made a considerable sum despite paying tens of billions of dollars to policyholders as a result of Katrina, which is widely described as the largest insured disaster in U.S. history, and a string of other storms.
Besides boosting profits, the industry raised its surplus by more than 7% to nearly $427 billion, according to an analysis of company filings by the National Assn. of Insurance Commissioners, which represents regulators from the 50 states. The surplus is intended to provide a financial cushion in times of high claims.
The industry covered virtually all of its claims and expenses with premiums earned during the year rather than with surplus funds, according to the organization's analysis. The ratio of claims and expenses to premiums was among the lowest in three decades.
The question is: How, in a year that produced an estimated $56.8 billion in disaster losses, nearly twice the previous record and more than twice what insurers paid after the Sept. 11 attacks, is this possible?
The answer, in part, is that U.S. insurers purchased disaster insurance of their own before the 2005 storms, much of it from overseas firms. Executives said that half -- and by some estimates, nearly two-thirds -- of the insured losses from last year's hurricanes ultimately will be borne by so-called reinsurers, many based in Bermuda and Europe.
In part, it's because of what Hartwig called the "anomaly" of so much of the 2005 storm damage being caused by flooding, which private insurers don't cover and instead rely on Washington to handle through the national flood insurance program.
But the industry's remarkable performance also reflects a dozen-year effort by insurers to insulate themselves from the most extreme financial consequences of catastrophe by, among other things, shifting risks previously borne by companies to policyholders and the public.
The effort started after the last big batch of natural disasters in the early 1990s, among them Hurricane Andrew in Florida in 1992, and the Oakland hills firestorm in 1991 and Northridge earthquake in 1994 in California.
The effort has included industry adoption of increasingly sophisticated techniques for analyzing catastrophic risk, as well as self-imposed limits on how much firms will cover and where. It also has included successful campaigns to get states or state-created entities to shoulder such dangers as earthquakes in California and wind in Florida, Texas, Hawaii and elsewhere. And it has involved tightening policy language -- by, for example, narrowing the definition of "replacement cost" for homes -- in ways that leave individuals bearing more of the burden of putting their material lives back together after trouble strikes.
While premiums for homeowners insurance have increased by more than half since the early 1990s, coverage, especially in disasters, has shrunk. Historically, insurers covered a little more than 60% of total losses in disasters, according to Hartwig, the industry economist. During the 2004 hurricanes in Florida, they covered less than 50%, according to Hartwig's numbers. During Katrina, he said, they covered about 30%, due in part to the high flood damage.
In making these changes, the insurance industry has been part of a trend that has picked up steam as the U.S. economy has grown more competitive in recent decades -- a shift of financial risks from business and often government to individual households.
"If last year's hurricane season had occurred 10 years ago, it would have been devastating for the company," said Allstate Vice President Fred F. Cripe in an interview. "Last year, it was merely disappointing."