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Lockton: Buyers Need to Prepare As Insurers Stop Offering Price Discounts

Source: A.M. Best

Posted on 21 Nov 2011

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In the wake of one of the worst years for catastrophe losses and historically low interest rates, insurance brokerage Lockton Cos. reports U.S. property insurers have "put the brakes on price reductions."

"The hard market hasn't arrived because there still is capacity in the worldwide marketplace," said Jim Rubel, executive vice president at Lockton. He characterized the market as "difficult," especially for those in cat-exposed areas.

While there was not "one large hit to the reinsurers," this year, there have been a series of disasters throughout the world, including the February earthquake in New Zealand, the March earthquake and tsunami in Japan, and severe tornadoes and hailstorms in the United States in April and May, Rubel said.

This has been the second-most expensive year for catastrophe losses, topped only by 2005, the year of Hurricane Katrina, when global catastrophe claims totaled $120 billion. In the first half this year, insured losses from natural catastrophes and man-made disasters totaled $70 billion, according to a September study by Swiss Re.

"The next event, some say, won't be a $60 to $80 billion event, it could be a $20 or $30 billion event which would change the marketplace, but we have not had that yet," Rubel said.

Other factors, including the low interest-rate environment and the latest wind-model update from Risk Management Solutions Inc. have contributed to the firming market, Rubel said. Generally speaking with the new RMS version, wind risk increases in inland areas, as the revision considers that winds will dissipate more slowly after a hurricane makes landfall. The model has been the subject of discussion in the insurance, reinsurance and brokerage industries, as industry watchers debate its effects on inland risks, probable maximum loss estimates and reinsurance rates.

Insurers looking at their exposure and their requirements for capital to write business in wind-vulnerable areas have two options -- to buy more reinsurance or reduce capacity, Rubel said.

"A lot of folks, because of the constraints of capital, have decided to constrict how much they write as a means of dealing with that RMS additional exposure," Rubel said.

The Kansas City, Mo.-based Lockton was ranked the 10th-largest global insurance broker based on 2010 total revenues of $834.7 million, according to Best's Review's annual ranking of the top global insurance brokers. Its top lines in 2010 were commercial property/casualty; executive risks; employee benefits consulting; affinity programs; surety and retirement services.