Veteran risk manager Vance Beaumont probably didn't think he could be shocked by property insurance prices. But even he had to admit to being a little surprised in the fourth quarter of 2005. After the most costly hurricane season in history–a record $40.8 billion in insured losses in the third quarter of 2005 alone–premiums went up, but not nearly as much as the risk manager for Sun Microsystems Inc. had anticipated. As a member of the board of the Rocky Mountain chapter of the Risk and Insurance Management Society, Beaumont also had the opportunity to poll his board colleagues, who similarly reported single-digit price hikes. "I'm breathing pretty easily now," Beaumont says.
So where is it, where is the predictable knee-jerk insurance industry response to such significant losses? Like Beaumont, most risk managers expected double-digit hikes closer to 20%, and most insurers would like to have accommodated them. But in the wake of Katrina and the other major storms that buffeted the U.S., more than 10 new insurers and reinsurers applied to open their doors in Bermuda, including Hiscox Bermuda, Harbor Point, Validus Holdings, Ariel Re, New Castle Re and Flagstone Re. That translates into a lot more capacity–close to $10 billion, according to SNL Financial LC of Charlottesville, Va.–and thus more competition. "Carriers on average are trying to impose minimum 10% rate increases in the property area and in some cases liability, too," says Dick Schmidt, director of risk management at Illinois Tool Works Inc., a Glenview, Ill.–based global manufacturer of industrial products with 2004 revenues of $11 billion. "But generally, about the most they're able to get is a 5% increase because there is another carrier out there willing to take the business for less."
In fact, many industry observers consider the current market conditions as merely a hard spot in an otherwise softening market. Sun Microsystems' Beaumont, for example, projects insurers to "fight for whatever increases they can get next year, but barring another large catastrophe I imagine they will retreat back to a more competitive marketplace," he says. Brokers agree. "We would expect that as this capacity enters the market it will ultimately help insurers on the supply side, as well as our clients," says Robert Howe, head of the property insurance practice at New York-based broker Marsh Inc.
Recommended For You
Not everyone is quite so upbeat. Those buying insurance for companies in the hurricane-ravaged southeastern U.S. and Texas are looking at sizable increases in the cost of property insurance, as much as 50% in some cases, unless remedial steps are taken to literally batten down the hatches in preparation for Mother Nature's next blast of fury. Even companies with only a modest presence in the Southeast are facing slightly stiffer increases than their brethren. Dave Hennes, director of risk management at The Toro Co., a Minneapolis-based manufacturer of landscape products with $1.8 billion in 2004 revenues, says his premium increased close to 10% upon renewal of Toro's property policy in November. But according to Hennes, this was more of a reflection of the heavy toll on his company's underwriter than Toro's risk exposure. "We've got some exposure in Florida, but no losses from the storms," he explains. "But our underwriter was hit pretty hard and will post significant losses. Timing is everything with insurance. Had we renewed before the hurricanes, I'm sure [the premium] would have been flat." He notes that the "same thing happened to us after 9/11, which was another market turner that had nothing to do with our particular loss profile."
And not all market pressures suggest that market conditions will soften again. Reinsurers, who suffered the lion's share of losses from the hurricanes, have since increased premiums in their treaties with primary underwriters "as much as 100% in some cases," Marsh's Howe says. "This forces primary underwriters to re-evaluate their property risk portfolios," he explains. "A portfolio modeled in 2005 at $800 million in loss exposure may be evaluated as having an exposure of $1.5 billion this year. Consequently, insurers either cut back on the risks they will take or reduce the capacity they will provide, creating a supply problem. We're finding it tougher to put together a large, layered syndicated program for our clients with major catastrophic exposures."
The magnitude of losses from the recent hurricanes also highlighted severe under-calculations by insurers regarding the loss estimations they use in computer models. "Nine out of 10 commercial properties analyzed had [property] replacement values significantly less than the amount estimated by our construction specialists," says Karen Clark, president and CEO of AIR Worldwide Corp., a Boston-based computer modeler. "An accurate replacement value, which is the full cost to replace a building in the event of a total loss, is essential for an accurate catastrophe loss estimate."
CONSIDER THE CONTEXT
Damien Magarelli, a director at New York-based Standard & Poor's, predicts that the computer models that insurers use to estimate losses in catastrophes will change this year to indicate higher frequency and severity. "The market is [already] reflecting potentially higher loss frequency and severity in catastrophic events," he says.
But brokers also point out that the premium increases on the property side must be understood in the context of the soft market of the past two years. "We were seeing fairly significant rate decreases through 2004 and 2005, with the median decrease over this time around 10%," says Howe. "Our review of accounts on Nov. 1 indicates that 40% experienced some type of increase, while the remainder had a flat renewal or were down a little. When we pull up our December numbers, I think we will see more increases, but given the rate decreases of years past and the industry's current losses, the [rate hikes] are not out of the ordinary."
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
