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Lines Between Standard and Excess Surplus Markets Continue to Blur, Says NAPCO CEO

Source: Bestwire

Posted on 21 Dec 2010

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Following mild hurricane losses in 2009 and 2010, the catastrophe property market continues to soften. As companies look for new ways to grow revenue while rates remain soft, the lines between the standard and excess and surplus markets continue to blur, said David Pagoumian, chief executive officer of wholesale broker Napco LLC.

"The standard markets are going into E&S and E&S is going into standard markets. Companies are being flexible for opportunities," Pagoumian said.

"As we are all trying to stretch in our operations, we're starting to evade other areas."

While the 2010 Atlantic hurricane season was the third most active on record, there were no U.S. hurricane landfalls for the second straight year, according to reinsurance broker Aon Benfield's Annual Global Climate and Catastrophe Report. The season also marked the fifth straight year that the United States has avoided a major hurricane strike, with the last being 2005's Hurricane Wilma in Florida, Aon Benfield said.

There was also a 38% increase in the available capacity of U.S. national catastrophe programs at July 1. Insurers only purchased about 85% of the reinsurance capacity offered then, down from 93% of capacity offered for the same time last year, according to Aon Benfield.

Expect to see new players continuing to enter the property catastrophe market in 2011, Pagoumian said.

"If not new start-ups, I think you'll see existing companies that don't write property catastrophe insurance now hiring a team to enter the market," Pagoumian said.

The trend for companies to reach into new areas is due to the lingering effects of a softening market, according to Napco's "State of the Market" report.

Most accounts will see rate reductions at renewal, with price declines so far ranging from 10% to 15%, according to the report.

Also, some accounts are seeing a reduction on windstorm deductibles, which in some cases are being lowered from 5% to 2% or 3%.

But, Pagoumian said, the market can't continue to soften indefinitely.

"There is a wall I see," Pagoumian said. "Margins are shrinking for underwriters. At some point, the forces are going to start pulling in the other direction."

Rate decreases in 2011 will not be as dramatic as they have been, and prices may flatten out as underwriters look to stabilize their portfolios, according to the Napco report.

This despite the uptick in natural catastrophic activity in 2010, which caused a total of $38 billion in insured losses in 2010, up from $20 billion in insured losses last year, according to Aon Benfield.

"It was a pretty big catastrophe calendar this year, but it was a bunch of nips and tucks that added up. It wasn't the typical knee-jerk big event that would take us back to what we experienced after [hurricanes Katrina, Rita and Wilma]," Pagoumian said.

Napco, which specializes in catastrophe property coverage, estimates the market is so well capitalized today that it would take cat losses of more than $50 billion to dramatically turn the market.

But, the industry does not need a hard market to be profitable, he noted.

"Does anything really need to happen right now?" Pagoumian said. "I don't think there is anything fundamentally wrong with where the industry is today in terms of profitability. There's a lot of healthy signs. It's a good push in the direction of a better breed of underwriting."