I Don't Understand Insurance

Insurance companies paid out 85% less in 2006 than in 2005:

The insurance industry paid out some $8.8 billion in claims in the United States in 2006 -- a sharp drop from hurricane-plagued 2005, the ISO's Property Claim Services unit reported Tuesday.

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In 2005, 24 events were classified as catastrophes but they included Hurricanes Katrina, Wilma and Rita and resulted in insured losses of a record $61.9 billion, the company said.

Even in 2005, with all those hurricanes, the insurance industry profited, as seen in this April article in the LA Times:

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.

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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.

This year saw more catastrophes, but less expensive ones:

Property Claim Services, which is based in Jersey City, N.J., said there were 33 catastrophic events last year, the highest frequency since 37 in 1998. Insurers received some 2,272,000 claims for damages, it said.

Interestingly enough, for all the grief we are given for living here, we weren’t in the ISO’s top five for 2006:

State - Loss ($)
Indiana - $1.5 billion
Missouri - $878 million
Tennessee - $873 million
Texas - $688 million
Kansas - $601 million

So, insurance companies profit when they pay out record claims, not to mention adding to their surplus (a true rainy day fund). Yet, in a year with fewer claims, all of our insurance goes up, presumably adding even more to their profit and surplus.

Huh?