By Dan Reynolds
A quarterly insurance pricing report from Marsh points to a commercial insurance premium pricing environment that sources describe as rational; except in workers' compensation, a market that continues to defy logic.
In its Global Insurance Market Briefing, released in April, Marsh said the first quarter of 2013 saw rate increases in all lines in the United States at between 2 percent and 4 percent. Internationally, according to Marsh, due to a lack of major losses in 2012, rates decreased on average about 1 percent.
From this, we can conclude that the crest of a hard market that was shaping up in the last two quarters of 2012 has largely leveled out, except for the Northeast, where many insureds might have been caught unprepared by Superstorm Sandy, which made an abrupt beeline for New York and New Jersey last October with painful consequences.
"The overall property market remains pretty competitive," said Dean Klisura, the New York-based U.S. Risk Practices and Specialties leader for Marsh.
"Whatever hardening we saw through 2012, certainly ended in the back half of 2012. When we look at quarter-over-quarter rate comparisons, the rate increases aren't accelerating across the entire property market, it's kind of moving sideways per quarter," Klisura said.
And as eye-catching as Sandy was, it just wasn't big enough, at between $20 billion and $25 billion in insured losses, to effect much pricing change overall.
That's because although the United States had big losses in 2012, most of the rest of the world didn't, according to a report from Munich Re.
The reinsurer reported that 90 percent of global natural catastrophe insured losses in 2012 were attributable to events in the United States.
Munich Re estimated overall losses from Sandy at $50 billion and insured losses at $25 billion.
"The industry is so well capitalized that even though Sandy was a huge event, it's not going to bring on a hard market," said Jon Hall, an executive vice president with FM Global who spoke with Risk & Insurance® at the RIMS conference in Los Angeles in April.
"It is turning into a firmer market, and I think Sandy is one component of that," Hall said.
That is, in property at least, with the exception of New York, where according to Marsh's Klisura, there have been substantial coverage pullbacks from carriers and sharp price increases.
"Many of our largest clients located in the Northeast had huge Sandy losses," Klisura said.
"Those that had significant losses are going to be looking at pretty significant rate increases, increases in retentions, reductions in sublimits for flood zones, and major reductions in capacity," Klisura said.
As an example, Klisura said, one major carrier, that might have provided $100 million in capacity for some risks as a lead market in the Northeast, is more likely to now offer only $25 million.
But there is just too much capacity in the market, along with other factors, for a general hard market to get much traction.
"There is plenty of capacity out there anyway and that is not changing as long as the Fed and other central banks keep printing money," said Ben Walter, CEO of Hiscox USA, who also spoke to R&I at the 2013 RIMS conference.
"The second thing is that the models changed again and in the insurers' favor, so that is mitigating some of the effect [of Sandy] and the third is that there are big changes going on in the way that risk capital flows into the CAT markets and with alternative forms of capital," Walter said.
The capital from hedge funds flowing into CAT bonds, and Industry Loss Warranties, where an industrywide loss above a certain point triggers a payout, are examples of those increased capital flows.
"Is that net premium growth to the industry?
"Probably not, if anything we are shrinking from a premium perspective in the industry," Walter said.
Overall, according to FM Global's Hall, carriers have to be happy that they are getting some rate increases and buyers should be in a pretty good place too.
"I think the market is in a pretty good equilibrium in the U.S. in property, where rates had come down quite a bit; they are firming a few percentage points here and there," Hall said.
"There is plenty of capital so there is no hard market on the scene, but buyers overall have got a pretty good deal," Hall said.
The Irrational Place
Except, of course, in workers' compensation, where combined ratios for carriers are terrible. There, many carriers are pulling out of the market altogether and those that are staying in are having a hard time getting any price traction.
"I think the story is very much the same for workers' compensation as it is for excess umbrella," Marsh's Klisura said.
"You look at the increases that are required for some of these carriers to return what they need and they need significant rate increases and they are just not getting them," Klisura said.
Given the loss ratios involved, workers' compensation is an area where all this capacity is leading to an irrational market, a market that despite the losses it sees, just isn't getting the price it needs.
In the example Klisura gave, a lead umbrella carrier might be able to get a 10 percent increase on the first layer of coverage but there might be 60 other carriers in the excess layers who are competing fiercely at reduced prices.
"It is hard for the carriers to get any kind of pricing leverage. The market appears to be very inefficient, particularly in the comp area," Klisura said.
"Rising medical costs, you look at the underlying drivers, the inflationary costs around this type of coverage and it seems like most carriers should be fleeing this coverage," Klisura said.
According to another report put out in April, from the Washington, D.C.-based Council of Independent Agents & Brokers, workers' compensation continued to be a hard line to place.
"Brokers across the country reported large price increases and in some areas capacity shrunk," the Council wrote.
"A Midwest broker said some carriers had no appetite for the workers' compensation business at all," the Council said.
That's because price traction isn't occurring.
"In Q1 2012, 46 percent of our clients got rate increases in workers' compensation and here we are [now in Q2 2013] and it is up to 54 percent. It is barely moving," Klisura said.
Although, due to the factors stated above, Sandy was not a market mover, that doesn't mean carriers are taking what happened laying down. There are lingering questions about whether properties in the affected area were valued properly and whether risk management might have fallen down in some places. This is leading to much more strenuous conversations between risk managers and carriers.
FM Global's Hall referred to the malaise of "Irene-Apathy." That is, the failure of Hurricane Irene to be much of a wind event may have lulled business owners into complacency, leaving them vulnerable to Sandy.
"I don't think people were as prepared as they should have been," Hall said.
"You look at some of the pictures and you see parking lots full of buses underwater and you think, all you had to do was move some of those buses. You look at facilities where there is all of this stock out in the yard and you think, all you had to do is move that stock, move it up or move it out," Hall said.
Trust models or not, but when RMS 13 comes out this summer, Marsh's Klisura and others said underwriters are going to be going over the new models stringently and trying to better manage their exposure to future storm activity.
Besides looking at models with a magnifying glass, Hall said, his company is working with insureds to strengthen flood emergency response plans, including adding fixed protection [not sandbags], such as temporary aluminum walls that can protect doorways and garage entrances.
Spending the money to put elevator motors on the top of buildings rather than the basement is another practical switch.
Of course all of this has a cost.
"If you look at the people who have had a huge loss, lost clients because you couldn't fulfill an order, or lost data centers, the [mitigation] cost is pretty small," Hall said.
"You have to say to people, 'Do you understand the hazard? Do you understand what can happen here?'"
Dan Reynolds is editor-in-chief of
Risk & Insurance®. He can be reached at firstname.lastname@example.org.
June 1, 2013
Copyright 2013© LRP Publications