Carrier Squeeze

Editor's note: International Catastrophe Insurance Managers LLC, headquartered in Boulder, Colo., was formed as an underwriting manager in 1998. ICAT specializes in providing commercial catastrophe insurance coverage to businesses located in catastrophe-exposed regions of the United States. Founder and CEO Jack Graham discussed the state of the catastrophe insurance marketplace with Risk & Insurance® Managing Editor Cyril Tuohy.

Q: What's your perspective on the current environment?

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A: (With) the cost of reinsurance, meteorological conditions, rating agency pressures and the losses that have been incurred in the last couple of years, the marketplace has just fundamentally imploded. What we've seen to date in 2006 is going to pale compared with what we're going to see in the coming three quarters in terms of renewals, rate levels, new business. I think we're going to see the cost of insurance for policyholders that have exposures to hurricane risk go up significantly. It's just inevitable.

Q: What does that mean for managing general agents?

A: It means that MGAs that have not established themselves as having a proven expertise in catastrophe insurance underwriting are at risk in terms of their ability to perpetuate their relationships with issuing companies. An insurance company that's willing to take catastrophe risk may decide that they are going to reserve that capacity for their own insurance activities and not delegate that to a MGA.

Q: Are some MGAs looking to abandon the catastrophe insurance business?

A: I don't think anybody's interested in doing that voluntarily. The market may force them to do that. We'll (see) if whether or not that in fact does occur. So if carriers decline to give out underwriting authority to MGAs, then they either are going to go away or they are going to have to find alternative ways to run their business. We've seen a couple of companies pull out of the marketplace. We've seen a couple of MGAs lose their ability to underwrite on behalf of certain carriers (in property CAT.)

Q: Do you think there will be some consolidation on the part of the MGAs?

A: I would not expect that to occur. Whoever is going to buy into or merge with a company that's a specialist in catastrophe insurance, they are buying into a significant amount of risk. I don't think it's a very good time for MGAs to be thinking about selling themselves or merging into other businesses, or for somebody who wants to buy MGAs to be thinking about buying those kinds of businesses. The risk factor is just too high.

Q: Do you think this will have a lasting impact on the industry?

A: I think this is a nodal point in the insurance industry. There's a permanent change taking place here. The cost of insurance is going to go up significantly, and I don't see it ever going back down to the levels that we saw in 2004-2005. There just wasn't a sufficient amount of premium to cover the exposure.

There's going to be some social dislocation here. It's going to be really hard on our policyholders. This is not a happy time for any of us. This is just something we're going to have to contend with. If you want to live near the water and see the water, it's just going to cost you more money.

July 1, 2006

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