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Weather worries

Brokers report market & pricing problems within 100 miles of coast; softness elsewhere

By Phil Zinkewicz

Property and casualty insurance agents and brokers these days are probably feeling a bit Dickensian in that, in terms of the availability of carrier markets, it appears as though these are the best of times and the worst of times.

As for the best of times, consider a recent property and casualty insurance market index survey conducted by the Council of Insurance Agents and Brokers (CIAB). For the second quarter of this year, the survey found that 51% of brokers responding said average premium rates for small accounts were down between 1% and 20%. An additional 28% of brokers registered no changes in small account rates compared with renewals in the first quarter of the year.

The drop in renewal rates was even steeper for medium and large accounts, according to the survey. Nearly six in 10 of the brokers reported that medium and large accounts were down 1% to 20%. An analysis of the Council’s survey data by Lehman Brothers said commercial premium rates declined by an average of 3% for all sizes of accounts during the second quarter of 2006. Among individual property/casualty lines, all experienced a decrease except commercial property, which increased 9.3% during the second quarter.

So, now we come to the worst of times. It appears that the reason insurers are chasing after this segment of the marketplace is that they have to make up for premium dollars lost as the result of their overall shunning of the areas most susceptible to catastrophe property losses.

The CIAB survey showed brokers and agents reporting that premium rates for coastal properties were up 300% to 500%—and some even by 600%—and that the impact was being felt as far as five miles inland.

Brokers said that higher property rates and deductibles and lower coverage limits were the industry standard during this year’s late spring and early summer months, with significant differences in the way catastrophe-exposed risks were being underwritten. “The market is changing daily,” said a broker from the Southwest. “Capacity is scarce, and it’s a great concern that later in the year, there may not be any capacity left.” The broker was referring to the Southeast Gulf Region and Texas in particular.

Another broker from that region said, “Rates are up 300% to 500% on commercial property and builders risk. Deductibles increased 200%, and it is also deductible by location, not by occurrence.”

That broker also reported, “Carriers are fighting insureds on all aspects of storm claims, business interruption, property, equipment and marine. Any large claim gets delayed through carrier claims reviews and sign-offs for advance payment.”

A significantly larger number of agents and brokers cited concerns about capacity as one of their top three market worries in this survey. More than half—55%—listed capacity, compared with 40% who identified it as a top concern in the first quarter survey.

Capacity and pricing problems were not confined just to at-risk properties along the coast, the survey showed. Commercial earthquake insurance is increasing 50% to 100% for renewals, several brokers reported, and there are also significant increases in deductibles.

One independent insurance wholesaler based in New York has experienced first hand the problems of brokers in the current catastrophe insurance market. In an interview with Rough Notes, J. C. Sparling, executive vice president of Mercator Risk Services, said that risk managers and business owners recently had to swallow a bitter pill during annual insurance renewals for properties that are exposed to catastrophe, including steep price increases and new limitations on policies, pointing to a severe shortage in the total amount of commercial and multi-family property insurance available.

“Property coverage for tier-one wind and flood is near capacity,” Sparling said. “Ratings agencies are scrutinizing many insurers for ‘cat’ exposure, auditing their surpluses to make sure they can cover possible losses from this year’s hurricane season.”

Sparling said that catastrophe capacity shortages no longer affect just Florida. “Underwriters for the Gulf Coast, especially Houston and the Carolinas are also feeling the pinch,” he said. “As a result, some underwriters are now redefining ‘coastal’ as any property within 100 miles of the coast. The standard benchmark is within 50 miles of the water.”

The wholesale broker said also that revised catastrophe modeling systems are showing higher probable maximum losses from wind and flood, causing property underwriters to reassess their exposures on renewals and perhaps increase their attachment points on cat risks.

“In the midst of this crisis, retail brokers for owners of smaller middle-market coastline properties are facing a steep challenge in placing coverage,” said Sparling. “The smart retail brokers are explaining this market climate to their insureds far in advance, putting the wholesaler and the client together in terms of expectations and goals. In an environment where risk managers and business owners are firing retail brokers because they were unprepared for the capacity shortage fallout, and hiring new ones, retail brokers that triple-check valuations and design submissions that underwriters will take seriously are going to keep their clients and probably attract some new ones,” he said.

Rough Notes asked Sparling whether the hard market for catastrophe coverage has hit the Northeast in light of recent reports that Allstate has become extremely selective in writing coastal properties in that area of the country. Allstate has said it will concentrate its marketing efforts in the Midwest.

Sparling said that, while he has heard a good deal of “chatter” in the marketplace about the Northeast being due for a major hurricane, he has not heard a significant number of companies say that they are not writing business there. “The hard market is broadening in scope every day,” Sparling said. “First people were concerned about Tier 1 Florida. Then all of Florida became Tier 1. Then the entire Gulf area became a problem. Houston was always considered on the cusp of underwriting concern, but now it’s feeling as much pain as Florida. Also, the Carolinas are feeling the hard market. Some underwriters are talking about the Northeast as a problem area, but it hasn’t reached crisis proportions yet. Nevertheless, in terms of underwriters’ appetites, there’s no doubt that there is a feeding frenzy in the Midwest and nobody’s home in wind-prone areas where there is greater exposure to catastrophes.”

As for how retail agents and brokers can cope with the hard catastrophe market, Sparling said they should meet with their clients for strategy sessions. “Find out what their needs are, how their shareholders feel about bearing more risk and about the client’s bank loan covenants. Switching brokers is not the answer because, by the time a new market is approached, the market may have eroded even further. Risk purchasing groups are a good idea, but they take time to set up. The time to set up a purchasing group for the current market was six months ago. The sad truth is that we’re seeing a decrease in take-up rates on quotes right now because prices are so prohibitive,” said Sparling. *

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