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Cat Property Insurance Market Trends Include Ample Capacity, Better Underwriting Discipline, and Steady Price Increases

Featuring David Pagoumian, CEO, NAPCO LLC

Posted on 21 Dec 11

In November, NAPCO LLC, a wholesale broker specializing in catastrophe property coverage, published its bi-annual “State of the Market” report. The report combines insights from top brokers with an analysis of recent catastrophe property market statistics in addition to assessing the terrorism insurance market since the September 11 terrorist attacks. According to the report, the cat property sector continues to transition away from soft market conditions with pricing trending somewhat higher despite ample capacity, and underwriting discipline is taking on more importance in the wake of a tough year, deteriorating profitability, and changes to risk models.

We followed up with David Pagoumian, CEO of NAPCO LLC, to discuss the report’s findings and get additional insight into the cat property market today.

Annie George (AG): Although we’re seeing pricing begin to increase, one of the key trends the report finds is that there’s still ample capacity, which is preventing rates from rising significantly.

David Pagoumian (DP):“That’s correct. There is plenty supply for cat capacity and while the demand exists, it’s not at the levels we might anticipate. What’s more, some of financial industry that entered the cat business post-Katrina have stayed in the business, and built solid insurance entities. If you were to compare the number of property cat writers pre- and post-Katrina, you’ll see that there are 50% more property cat writers today.

“Additionally, when Katrina happened, you had a knee-jerk reaction from many insurers to increase prices overnight. You saw a 50% increase in renewals right after Katrina, as the ripple effect of the loss was felt immediately. The industry lost $60 billion and it had to be replenished. But in today’s market, we’re seeing 0-15% increases, sometimes upward depending on the account and the circumstances. A flat renewal is common and considered a success.

“Additionally, reinsurers are still well capitalized, and the health of these companies is much better. They’re better prepared for a storm. You’re not seeing, as we did in the past after an event occurs, some insurers going out of business.”

AG: What impact have the Risk Models had on pricing in the property cat market?

DP: “The Risk Models have been recalibrated to take into consideration data gathered and analyzed after Hurricane Ike. What we saw with Ike was that, in some areas, communities considered Tier 2, 3, etc. got hit as if they were at a Tier 1 level – the first line of defense where most of the damage occurs and where stronger building construction exists to better weather these catastrophes. But Ike penetrated Tiers 2 and 3 and wreaked havoc in areas that were not considered as vulnerable as Tier 1. Adjustments were made to the formulas of the models, treating Tiers 2 and 3 as a Tier 1 risk in certain areas, such as the inland of Texas, Mid-Atlantic States, New England, and up Florida’s spine. These areas are ideal for hurricanes, which hit with such ferocity and sometimes bypass Tier 1 areas pushing deeper inland. As a result, some of these areas are seeing 15%-30% rate increases with the new Risk Models. 

“What this all means is that insurers are looking at their book of business to make sure they adequately price certain regions and to ensure they can handle a series of cat losses, whether it’s a hurricane and a major earthquake or three consecutive hurricanes as we saw with Katrina, Rita, and Wilma. When companies run the new model through their portfolio and it increases their PML by 20-30%, if they don’t make the necessary changes, rating agencies will put pressure on them to do so or they will get downgraded. This may mean insurers letting go of business that hurts their portfolio, charging more, or exiting certain areas for a while.

“The new models are helping insurance companies manage their portfolios better, and keeping them in the game longer. The longer they stay in the game, the longer they provide capacity, and the more they show others this business model works. This signals to others to enter the market – that cat property is an attractive business for those who are professional and know how to manage their aggregate portfolio and work with the rating agencies.”

AG: Let’s discuss underwriting discipline and what the report revealed.

DP: “Underwriting discipline is taking on much more importance. Net income for the first half the year was down 72% as result of cat losses and poor investment return. Companies once made money from their premium float in investments. Today, they’re not able to glean as much from their investment, which is forcing them to make money doing what they do and that is through disciplined underwriting.”

AG: What other factor is influencing the cat market?

DP: “You have different layers and participants in a cat program, which helps to keep costs down. Let’s say you have a $100 million account on the water. It’s very rare you get one company writing the entire risk. You have perhaps 12 companies participating, with each taking a piece of it, spreading out the risk and enabling them to manage their book of business better.”

AG: Do you foresee a traditional hard market in the future?

DP: “The term ‘hard market’, I would suggest, has changed for the time being. If everything remains status quo, I don’t anticipate we’ll see the market hardening as we traditionally have seen in the past – unless a big event occurs, like a Katrina or devastating earthquake hits. The bottom has bottomed out, and for now we’ll experience a steady climb in rates.

“It would take a sizeable event for a hard market. Some people talk about a $20-30 billion event or a $50 billion event. I believe it would take a $50 billion event to force the market to turn around overnight.”

You can obtain a copy of the entire NAPCO report at:


Founded in 1996, NAPCO is a full-service property wholesaler broker. Headquartered in Iselin, New Jersey with offices in Florida, California, and the Pacific Northwest, NAPCO works with retail brokers to meet the complex and difficult risk-transfer needs of commercial insured and public and private entities through its analytical approach and global network of property markets.