By Janet Aschkenasy
Talk about being in the right place at the right time.
In August, as Hurricane Isaac threatened Miami, Scott B. Clark, risk and benefits officer for the largest employer in South Florida, knew things could have been much worse had he not crossed paths with a GRC Engineering official last year.
That firm helped him mitigate the probable maximum loss estimates he'd previously received based on the latest catastrophe model released by RMS.
Clark is not only the immediate past president of the Risk and Insurance Management Society Inc., but for 25 years he has also been the risk manager for the Miami-Dade County Public School District. His story is a highly instructive one.
He was sailing on the Lloyd's of London Loutine yacht during the Association of Insurance and Risk Managers in Industry and Commerce (AIRMIC) conference in 2011 when he ran into a GRC executive. Clark spoke of his concern over his catastrophe insurance renewals for 2012. RMS 11 had more than doubled the school district's probable maximum losses (PML) from $900 million to nearly $1.9 billion, though Clark felt sure his loss potential for a major storm was nothing of the kind.
Fortunately for Clark, he was able to turn to GRC's California-based engineering and modeling company, GRC Miyamoto, which does structural engineering work and has created its own catastrophe windstorm modeling software.
"We had them on-site for several days to complete a structural assessment of a good cross section of our properties. Their model, with the construction information collected by their engineers, ended up with a PML of about $700 million for a 250-year storm," he said.
Not only that, but when shown the report, RMS ultimately agreed with the new estimates, telling Clark that the ISO codes the school district had originally submitted were not converting to the proper RMS codes within the model.
"They told us how we needed to recode our property schedule using specific RMS codes," said the risk manager, and when the district's risk team reran its newest data with the proper codes in the latest RMS model, "our total 250-year PML was reduced by close to a billion dollars to less than $900 million," he said.
Clark still had to purchase less coverage through the excess and surplus lines market than he did the previous year to keep costs in check, and since property values have plummeted in his county of late, Clark had less local tax revenue to put toward his May, 2012 renewals.
When all was said and done the school district had to settle for $200 million worth of property limits instead of the $250 million it had last year in order to keep its premiums to what they'd been in 2011.
"Many similar entities located in 'CAT' windstorm-prone areas not only lost property limits, but paid much more for the lower limits they were able to purchase," said the risk manager, who still has the same excess and surplus nonadmitted markets in place as lead carriers as before -- underwriters at Lloyd's of London as well as Lexington Insurance Co., and Swiss Re.
Interestingly enough, when Clark's Lloyd's contacts saw the newly reduced probably maximum loss figure, they told him they wanted to go back and negotiate with their reinsurers, and that helped loosen some Lloyd's capacity, Clark said.
The district's broker, Dave Marcus of Arthur J. Gallagher & Co., was instrumental in getting RMS to rethink the school district's probable maximum loss and sell the revisions to underwriters, Clark also said.
Clark is hardly alone.
Buyers tapping surplus lines markets for property coverages with catastrophe potential are finding premium ratesincreasing across all marketsthis year.
The surplus lines industry, according to an A.M. Best & Co. Inc. report published last year is battling declining exposures, mounting underwriting losses and stiffer competition from the standard market. The result is an industry under enormous pressure to raise prices.
Those feeling it the most include risk managers with exposures in wind-prone territoriesfrom Floridathrough Texas.
All are seeing specialty markets and traditional markets retracting their capacity, requiring more insurance carriers to layer up on a single risk,which often results in more premium payouts as well.
Some of the trickiest cases include exposures in Houston and other parts of Texas -- which produced unprecedented tornado activity this year. These risks have seen surplus-lines rate hikes as high as 20 percent to 25 percent this year, one wholesale broker observes.
Excess and surplus lines experts recite a litany of 2011 and 2012 disasters that have made for a rapid rise in property insurance rates, including the Tokyo and New Zealand earthquakes early last year, and the spate of Texas tornadoes that hit in 2012. For now the twister activity seems to have quelled some and rate increases have slowed, said Duncan Ellis, U.S. property practice leader at Marsh.
Still, those sorts of events have created an insurance market where an E&S underwriter that at one time consistently provided $50 million in catastrophe limits may now offer just $25 million. Carriers are also moving to different attachment points, said Ellis, and may break up a larger $50 million layer into smaller more "manageable" layers with more insurers on a single risk.
Of course, much depends on the particulars of the exposure and the rates in question. "If the pricing is really good and the carrier is not overly exposed in that particular area, then maybe the underwriter will be willing to provide more capacity independently," said Ellis.
This is not happening solely in the surplus lines market but the admitted market as well, said the broker.
So long as you're after property coverage, "It is happening everywhere," he said, adding that most carriers -- Zurich, ACE, XL -- have both admitted and nonadmitted arms. If a carrier like Bermuda-based XL Insurance doesn't want to place the risk with its traditional arm, it may just bounce the risk to its excess and surplus lines unit, Ellis said.
But coming off a difficult 2011, "It's not uncommon now to see a 20 percent to 30 percent increase in the number of carriers on the primary layers of a risk," the brokerage expert said.
Boston-based Lexington Insurance Co., the largest U.S.-based surplus lines carrier with an estimated 14 percent of the $31-billion marketplace, is one insurance carrier which has become more circumspect over the past couple of years.
Lexington President David Bresnahan said that up until 2009, his company used to frequently write limits of $50 million of critical property catastrophe coverage.
Since then insurance buyers who have previously faced major windstorm, hurricane, or flood-related losses for their properties and continue to face major catastrophic consequences will see that Lexington and other excess and surplus insurers are more closely examining pricing, he said.
Today, Lexington is still likely to take the lead role on layered, primary property risks and supply $25 million in limits, sharing the layer with other carriers who might assume a much smaller piece of the total in a quota share arrangement.
Bresnahan said he's not shy about disclosing that when Lexington agrees to supply such limits for 2012 renewals, its average price for catastrophe and noncatastrophe related property coverage has increased a total of 14.3 percent over 2011 rates.
This includes the most hazardous risks Lexington will accept as well as the best of the best, but excludes risks Lexington quotes but does not ultimately bind.
Michael Carr, senior vice president for Excess & Surplus Lines Property at Liberty International Underwriters said another aspect straining capacity is the shortage of capital to begin new insurance startups.
"After a major event, say a Katrina or a 9/11, there's usually an influx of capital to start new markets," said Carr, who is based in Atlanta.
But because the latest catastrophes have come so fast and furious "the profitability hasn't been there," he said, and there's insufficient capital to write catastrophe business."
LIU, a division of Liberty Mutual Group, however, did see fit to create a new excess and surplus startup that began offering limits last year, working exclusively with wholesale brokers and targeting property risks with total insured values of more than $25 million.
Carr, a 30-year industry veteran, said the company has "capacity up to $25 million," and that LIU will work on programs that are layered or shared.
For his part, Clark -- having made it through Isaac -- said things were not too bad this time around, but they remind him why he wants out of "hurricaneland" when he retires. The risk manager lost his home to Hurricane Andrew 20 years ago.
JANET ASCHKENASY is a freelance writer based in New York.
October 1, 2012
Copyright 2012© LRP Publications