The Market's New Foreign Forces

Policyholders holding their breath for the next soft market swing may pass out.

According to experts at a leading brokerage firm, the outside influence of the ratings agencies might moderate any future softening of property rates.

Beware of the Spike (08/01/11)
Embrace Your CAT Models (08/01/11)
New Model Leaves Insurers Black and Blue (08/01/11)
Catastrophe Rates up, Capacity Down at Midyear (07/05/11)
An Urge to Eat a Modeler (08/01/11)

Instead of relying on the natural ebb and flow of the insurance cycle, said Kevin J. Madden, managing director of Aon's Real Estate Practice, policyholders now have to hope that additional capacity floods the property-catastrophe market for their rates to drop.

Madden was speaking at an Aon Web seminar titled "Real Estate Property Insurance: Crisis or Hysteria?" that occurred in August.

And the reason, said the brokers speaking at the event, that policyholders are holding their breath--hiked up property rates, especially prevalent along the coast and in certain industries like real estate and energy--is in part the result of another outside power in the insurance industry: the modelers.

According to the seminar speakers, the new version of one CAT model in particular--Risk Management Solutions Inc.'s 2006 hurricane model--has caused upwards of 40 percent to 100 percent increases in insurers' probable maximum losses, or PMLs.

The firm's earthquake model has also caused a jump in PMLs. This perhaps can explain why there has been a 70 percent drop in active catastrophe capacity.

Insurers are also shedding exposure because ratings agencies are asking them to prove that they can handle not only a massive, one-time loss, but multiple, simultaneous catastrophe hits, said Aaron Davis, director of terrorism and property resources for Aon Risk Services national practice groups.

As Madden described them, ratings agencies have become the "governors" of the market.

October 1, 2006

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