Posted on 14 Feb 2013 by Neilson
If you had asked most people living in the metropolitan New York area on that third Sunday in October 2012 about their biggest concerns, most responses would likely have hinged rather trivially on the respective right arms of Eli Manning and Mark Sanchez. It was then that a menacing low pressure system was churning to life 1,600 miles south, taking seven days and a serpentine path en route to becoming the largest Atlantic hurricane on record. Sandy, as the storm would become known, took a final hard left turn before running directly into one of the most densely populated areas of the United States, causing hundreds of deaths and more than $60B in property damage. While winds have calmed and storm surges rescinded, the impact from Sandy continues.
While the insurance impact from the storm is already evident because of the large influx of flood covers as the standard markets reduce flood sub-limits on larger accounts, we expect the greatest impact to be in the Northeast, particularly on smaller accounts placed with MGAs. However, despite the size and scope of this disaster, and the inevitable changes in pricing and coverage, we don't expect it to precipitate a hard market.
A Shift from Wind to Flood in the Northeast
Sandy will likely go into history and the collective lexicon as a hurricane, but technically it was downgraded to Super Storm status before landfall. Since the storm really had the greatest impact from a flood and storm surge standpoint, as opposed to wind, the flood peril will pose more of a concern moving forward. Historically, wholesale activity has been closely involved with accounts that are catastrophe driven, with an element of Tier 1 wind, flood and earthquake. This may all change in Sandy's wake, however. An estimated 35,000 buildings have been added to flood zones in parts of New York City, and FEMA's advisory flood maps increased the areas falling into 100-year flood zones. As a result, there has been a significant increase in monoline flood submissions.
Markets like AIG/Lexington that typically put out large limits on large New York real estate accounts were, in some cases, including as much as $25M of Flood Zone A coverage. This working line has since been reduced to $10M for Flood Zone A/V, creating more opportunity and demand for standalone excess flood carve outs. Going forward, carriers will likely incorporate Percent Named Wind deductibles on coastal wind accounts in the Northeast, particularly in coastal areas such as Long Island, Long Beach, Cape Cod, etc. Following Hurricane Katrina, we saw markets redefine Named Wind to include associated storm surge - typically a flood peril - to provide a cleaner, more concurrent placement. As a result, some carriers will find themselves paying out more than anticipated because storm surge is included under Named Wind on broker manuscript forms for some larger New York City accounts.
Additional opportunities for reinstating flood aggregates are also likely. Because flood is a peril that is typically aggregated with quake, we've seen insureds that have satisfied all or most of their full flood sublimit midterm. In most cases the lender will require this peril to be reinstated, creating additional opportunities that demand a very high rate online.
What About Everywhere Else?
Before Sandy, market anticipation was that 2013 renewals would see somewhere between 5-10 percent reductions. While insureds in the Northeast are not experiencing those reductions, the majority of West Coast 1/1 renewals came in flat, if not with a slight rate reduction. Larger accounts could be getting special consideration because carriers are comfortable with the spread of risk, but the consensus seems to be that Sandy has had little impact outside of the Northeast.
After meeting with Bermuda and London treaty underwriters, one thing is clear: there is an abundance of capital in the reinsurance market with 1/1 pricing remaining mostly flat and with retrocessional placements actually down slightly. This was driven by the fact that the majority of the new capital deployed on these placements was through the Insurance-Linked Securities (ILS) space via non-traditional triggers and collateralized agreements. While there are a few new collateralized entrants focused on traditional cover, they do not have sufficient capacity to drive the market. The serious convergence of various ILS-based products offered by hedge funds has contributed to an excess of capital in the traditional reinsurance market, which will allow for pricing pressures on upcoming placements.
There were regional increases in the range of 25 to 35 percent for the Northeast, and we expect that E&S carriers will face increases due to the volatility of commercial losses versus residential, as well as the disproportionate amount of loss delivered by certain large placements in the affected areas. In London, cargo and species losses were getting particular attention as they were quickly stacking up to be in excess of $7B. This has caused several syndicates to re-evaluate their aggregate distribution and overview of underwriting for CAT in these classes of business.
Will Sandy Impact Northeast Models?
While storms with Sandy's sustained wind speeds have been contemplated in catastrophe models, a storm of Sandy's magnitude - tropical-storm force winds more than 1,000 miles wide, low central pressure, storm surge, and landfall angle - is harder to come by. RMS 11.0 model results for the Northeast actually increased, so previous assumptions that this region was "overpriced" will likely change, although to what extent will ultimately be left for the markets to decide. RMS does not plan to significantly change its hurricane model in the coming year, and, while event rates may change, to what extent remains to be seen.
The View From Across the Pond
If pricing is adequate, London views Northeast wind and critical flood throughout the country as growth areas. The reduction in flood limits supposedly being implemented by Lexington should offer new opportunities for other carriers (including Lloyds) to, at best, participate on All Risk programs, or, at worst, write top up flood-only layers. While there have been rumblings of London underwriters trying to increase deductibles for Northeast regional accounts - particularly coastal - there has been little evidence that they have been successful.
New Opportunities for Deductible Buy Downs
After Sandy, deductible reductions have all but disappeared from the market in the Northeast, creating increased opportunities for buy backs, with more people likely implementing percent deductibles. This provides retailers who have insureds accustomed to a flat $50,000 or $100,000 deductible with an opportunity to offer a deductible buy back for clients and prospects that are unable to accept a 2 percent deductible.
The Southeast will likely remain somewhere between flat and plus five, depending on coverage, but reductions are not likely. But, because of Sandy's impact, there will be new opportunities for deductible buy backs in the Northeast, though these new opportunities will also cloud pricing outlooks.
Generally speaking, the industry has not been entirely wiped out or even spooked by one of the most devastating storms in United States history. While select geographic areas will experience a rate impact from Sandy, the real opportunity for retailers appears to be in Flood reinstatement and an increased interest in deductible buy-backs. In the end, it doesn't appear that Sandy will usher in the hard market that many anticipated.