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By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®

Outside, on Feb. 25, 2010, New Jersey had ceased to be a winter wonderland and was now more like a gulag, with shovelers forced to dig out from one blizzard after another. Inside the shiny, airy new office of wholesale insurance broker NAPCO LLC, suited brokers and underwriters took their seats in a crowded conference room.

Jim Iervolino, vice president of risk management and insurance, was there to orchestrate the meeting. Such is the life of the risk manager that he must contemplate the risks and mitigation measures of a February conference in Iselin, N.J. (Web feeds to those who couldn't attend in person). This, while trying to put together a property renewal for May that took into account warm-weather-related perils like hurricanes and floods and all sorts of other catastrophe exposures.

But there was strategy behind the winter meeting. Wyndham renews its property program on May 1 to allow time for the "dust to settle" after reinsurance treaty renewals, and to be far enough away from hurricane season, explained Iervolino. For 2010, Wyndham went out to market in October 2009. Iervolino held the February meeting so that he and his brokering team could meet with underwriters and acquaint them with his property schedule, his risk management program and expectations for renewal.

"All of the meetings and all of the calls and all of the exhibits and all of the effort we put into it, the markets responded positively and it was reflected in our quotes," he said. In terms of rate, Iervolino reported, his renewal came "in line with expectations"--flat to a couple percentage points down on rate for an increased exposure base.

Regarding enhancements, Wyndham did not get everything it asked for. For instance, there was no pandemic endorsement. Wyndham did get a manuscripted endorsement for loss of attraction, named windstorm and earthquake deductibles reduced to $50,000, and increased civil authority and ingress and egress time periods.

Iervolino wondered if the results would have been different if they had a June or July renewal. For one, Wyndham suffered a significant flood loss on May 3. Iervolino also pointed to insurers' losses in the first half of 2010, and the specter of losses to be.

"Colorado State University is not doing anybody any favors," he said, referring to the famous hurricane forecasting team of William Gray and Phil Klotzbach, who are calling for an extremely active season.

"Everybody with a windstorm exposure obviously wants to be done with their property renewal before the start of windstorm season in June," agreed Bob Pendergast, president of Access Risk Services, which serves as outsourced risk management for clients, primarily private equity and sovereign-wealth funds.

Rick Vassar, general manager, risk, for Volkswagen Group of America Inc., saw a "pretty steady" property renewal way back in January. But his situation is a bit different. His property program has about 90 properties in it, including dealership sites, parts distribution facilities, port facilities and call centers. VW America has the right to purchase its own coverage but chose to go through the global policy of its German parent corporation, which works with Allianz.

"We have found that pricing is a lot better through the global program, and not just the pricing, the service as well," he said.

The rate is negotiated at the beginning of the year and VW America then pays on a per-value basis per property. So the trick for Vassar isn't necessarily sicking a team of brokers at the market; it is determining values on properties, many nonowned--say, a million-square-foot distribution center.

Or another trick will be what Vassar will face for next renewal, when in February 2011 a new auto assembly plant under construction in Chattanooga, Tenn., comes on-line and its insurance needs to be transferred from an owner-controlled insurance program (OCIP) to the property program.

Still, if the market remains as it is now, it could go pretty steady too. The overall impression from these risk professionals is that the market has been a friendly place to buy property insurance. Of course, that "if" is the billion-dollar question in property circles.

Pendergast, whose firm places commercial property programs for risks ranging from hospitality to retail and real estate, reported that he's seen "significant capacity for good risks" with rate reductions up to 10 percent in some cases for clients with good risks and good loss histories, which jives with what underwriters and brokers have said.

"We've seen even in Florida more wind capacity this year than even last year," Pendergast added.

So it's a friendly atmosphere for risk managers. For carriers and brokers, it's competitive--some might say worrisome--but it's not approaching insanity levels, is it?

Well, for starters, most large property programs are oversubscribed and incumbents want to remain on good programs. That means risk managers have choices, said Bob Klepper, president and chief underwriting officer of global property for Torus Insurance.

"Generally speaking, there will continue to be reductions in premiums and rates," he said, though adding, "We're not driving off a cliff when it comes to the market." It's more of a "glide path," as he put it.

When it comes to underlying terms and conditions, lowering attachment points and other enchancements, risk managers, Klepper said, are "pretty realistic on that" and expect to pay, and are paying, for these.

Then again, as Jon Murphy, head of global property at Ironshore, sees it, terms and conditions are not as tight. For instance, some markets are willing to lower wind deductibles from 5 percent to 2 percent or 3 percent in the "call of the top line."

"It makes all the difference in the world," Murphy said about lower deductibles.

Pendergast, too, is seeing markets "hungry for business" who will give flexibility in terms and conditions, lower deductibles and other risk manager wish-list items without charging more. Yet he calls the market a "benign situation"--i.e., without 20 percent to 30 percent reductions.

Some underwriters would argue, however, that the underlying numbers are far from benign, and that rates can't be cut so much because they already have been and are now hitting bottom.

The market is still "aggressive" in the viewpoint of Jonathan Hall, executive vice president with FM Global. Brokers are "going at each other" to show clients that they can land the better renewal.

"There doesn't seem to be any end to that either," he said.

The overall insurance market is awash in capital at the moment--$511 billion in surplus at year-end 2009--in part because insured values are down from the multifarious effects of recession. In particular with property insurers, it's also because they made some loot last year.

"The reality is, they made a lot of money," said Al Tobin, national property leader at brokerage Aon, adding that new players have also entered the U.S. market and existing players have upped their appetite for U.S. business.

"Too many markets chasing too few risks and too few exposures will lead to hypercompetitive markets," Pendergast summed it up nicely.

Yet hold on. Hypercompetitive? Even after the losses the market's already suffered in 2010?!

The property insurance market could be suffering "death by a thousand cuts," as Hall told us, referring to the many smaller CAT losses inflicted on the market in the first quarter and into the second. Then you have the "shadow" of the Deepwater Horizon "hanging over the market." That cleanup alone, as of this writing, had cost BP as much as $2.3 billion.

Many insurers blew through their CAT "budget" after the first quarter. And many have also played the prior-year loss reserve game for their quarterly earnings to the point where they don't have much left to release to bolster their bottom line. Keep an eye on combined ratios, Hall advised, as they inch toward 100 percent. And once you get up there, ratings agencies and investors start to lose their patience.

"It does need to move in the other direction. This is not sustainable," Klepper agreed.

"At some point, the market has to start to underwrite to a profit," seconded Bob Petrilli, managing director and head of IRI Americas for Swiss Re. "Something's got to give."

Could that something be precipitated by one or two massive losses of Katrina size or larger?

Perhaps something broad enough to significantly hit the few players who play at the primary CAT level in commercial insurance, the Lexingtons and Affiliated FMs of the world, suggested the risk advisor Pendergast.

Or how about a substantive second financial meltdown, perhaps involving the municipal bond market that insurers are invested in, suggested Hall.

Surely, the trigger won't be underwriters' complaining about the soft market.

August 1, 2010

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