Welcome to the 2009 Hurricane Season: A Merciless Moment in the Property Market
By CYRIL TUOHY, managing editor of Risk & Insurance®
and MATTHEW BRODSKY, senior editor/Web editor
Confused by all the talk of a hard market that's just around the corner but not yet here? You're not alone ... and there's an answer.
Here's what's going on, according to the industry's contemplative Eastern sage, Shivan Subramanian, CEO of FM Global, who spends much of his time sweeping the horizon from the crow's nest of his company's Rhode Island headquarters.
The market's pricing dynamics this time around are "a little slower than we thought," he admitted, during an interview last month at the annual gathering of commercial insurance buyers in Orlando at the annual convention of the Risk and Insurance Management Society Inc.
Primary carriers, the big guns of the property/casualty industry, are being forced to hold down prices. Floating above the primary carriers are the reinsurers who've no qualms about raising prices to replenish their capital base, which took a wallop in the wallet from natural disasters to the tune of $45 billion worldwide in 2008.
"The primary side is being held down and really squeezed quite a bit," Subramaniam said.
Add to that the fact that reinsurers and the Lloyd's market, as just so happens, execute transactions in pounds Sterling and right now that means there's less capacity in U.S. dollars. "So that will drive pricing up higher," said Subramaniam, "so capacity has shrunk."
This imbalance in commercial property pricing, between rates charged by the primary carriers to their buyers and the rates paid by the primary carries to their reinsurers, can't last much longer before the imbalance reverts to normal levels.
EFFECTS SEEN BEFORE JUNE 1
Some say the effects are already being seen at the start of the June 1 hurricane season. One rumor swirling around RIMS back in April was that one major property market cut its capacity from $200 million to $150 million because it got hit hard in its April 1 treaty renewal. And one could assume this is not an isolated event.
Such carriers are not cutting property capacity because they are financially unstable, said Anne K. Anderson, managing principal out of Integro's San Francisco brokerage office. It's more an issue of them deciding how best to use the "fairly precious commodity" that is property capacity.
"Nobody's looking to add new aggregate," said Anderson's colleague, Ryan Barber, an Integro managing principal in New York, meaning no one is taking on added exposure. Instead, Barber has seen carriers push for improvements at renewal either through raising rates, increasing deductibles or cutting capacity from one client to give to another.
That's right--different insurance buyers are faring differently in this harsh market. After recently renewing one large book, Anderson noted how desirable accounts got "treated fairly," while accounts with significant loss history experienced "significant rate increases."
Overall, from the talk on the street, it appears most underwriters are seeing below 10 percent rate increases for primary property buyers leading into the season, perhaps 10 to 15 percent for wind and quake. But there are also reports of rate increases upward of 25 percent for primary onshore and offshore energy and as much as 100 percent-plus increases for Gulf of Mexico risks.
Terms and conditions are also tight and retentions increased for both downstream and upstream energy, reported Tony Carroll, executive vice president and chief underwriting officer for Global Energy & Property at Liberty International Underwriters.
The only question is whether primary buyers will see more reinsurance rate hikes with the July renewal season next month. FM Global's Subramaniam believes they will.
May 29, 2009
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