Twenty days before Mother Nature devastated the Southeast a year ago, Lance Ewing showed up for his new job as vice president of risk management at Harrah's Entertainment Inc. in Memphis. Harrah's had acquired Ewing's former employer Caesars Entertainment, and Ewing was still in the process of surveying its properties. One month later, some of those properties were underwater.
Hurricanes Katrina, Rita and Wilma ultimately caused $1.5 billion in property insurance losses for Harrah's. A broad array of casinos, hotels, restaurants, movie theatres, children's arcades, parking garages, restaurants and retail shops in Gulfport and Biloxi, Miss., and New Orleans and Lake Charles, La., were shuttered because of extensive physical damage or because the government ordered them to close. Two riverboat casinos and those operated on now-submerged barges were unsalvageable. Massive losses from business interruption resulted.
On December 1, 2005, roughly one month after Wilma breathed her last, Ewing had the delicate task of meeting with underwriters to renew Harrah's property insurance policy. He ultimately stitched together a property program from 40 separate insurers and reinsurers in the U.S. and London marketplaces. "I had to basically beg the insurance markets to pay our claim and, on the other hand, not hurt us too much on the premium increase," he says. "I changed a lot of lead markets because of the drain in available insurance capacity. Several carriers had gotten into the marketplace and once bit, had become twice shy." The overall premium increase, he says, was well above 75%.
Recommended For You
As it turned out, Ewing was fortunate his meeting with underwriters was in December 2005 and not in April 2006. At the annual meeting of the Risk and Insurance Management Society that month, he ran into one of his underwriters. "He told me there was no way I could do the same deal today," Ewing says. "Evidently, once the dust had settled, the insurance and reinsurance appetite for windstorm, flood and earthquake exposures dried up. I was lucky the marketplace was in a state of flux and shock when I renewed. Other Fortune 500 companies were forced to go bare–self-insuring windstorm exposures because they can't get the coverage they want or won't pay the premium."
Ewing's cautionary tale reveals how risky property insurance has become for the companies in the business of insuring it. The intensity of last year's hurricanes, and the fact that this was underestimated in the computer models underwriters use to assess risk, resulted in billions of dollars in unexpected, insured losses. Consequently, the property insurance market for risk managers is changing dramatically. The latest underwriter models indicate that many more properties are exposed to windstorm risks, says Wayne Herrington, leader of the Southeast region practice at insurance broker Willis NA. "We now see many properties inland of the coast receiving much higher premiums and deductibles because of this," he explains. While Herrington notes that some premiums have already soared as much as 300% in the last year, he says the worst may not be over. Recent predictions by University of Colorado scientists that hurricanes will be more intense and frequent for the next 20 years suggest that companies should brace for more punitive risk modeling that could reshape the entire market in terms of both cost and availability of coverage. "An insurer that previously thought its portfolio of property risks was, say, $500 million has now learned from the new models that the portfolio carries a risk of $800 million and perhaps even $1 billion," explains Bob Howe, head of insurance broker Marsh's global property insurance practice. "To get back to the same level of risk they thought they were absorbing, they either must get rid of accounts or cut overall insurance limits, both of which put downward pressure on supply."
Exacerbating the supply problem are directives by rating agencies concerning the volume of property catastrophe risk held by insurers as well as reluctance among reinsurers to play in the market at all. "If a company wants to retain its rating, it may need to shed portions of [its] catastrophe risk [portfolio]," Howe says. Ultimately, Howe and others predict a much more protracted hard property insurance market cycle with more geographic spreading of risk and lower overall concentrations of risk among insurers. And this scenario doesn't even take into account the fallout from any government decision not to extend the Terrorism Risk Insurance Act when it sunsets in December 2007.
The remedy for companies buying property insurance, as Ewing learned, is to create a dialogue with underwriters, documenting the structural integrity of buildings and introducing bulletproof disaster plans. And one other piece of advice: Never build a casino on a barge.
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more inforrmation visit Asset & Logo Licensing.
