Posted on 18 Jul 2011
After years of intensive price competition, the impact of higher catastrophe losses and the new release of a widely used hurricane model in 2011, have made underwriters reassess their risk appetite, resulting in few rate reductions, reduced capacity and pressure to increase rates, according to a new State of the Market report by NAPCO LLC, a wholesale broker specializing in catastrophe property coverage.
The bi-annual report, a compilation of catastrophe property market statistics, can be found at: http://www.napcollc.com/articles/NAPCOInsuranceInsights-TheStateOfTheMarket-2011- June.pdf.
“The signs have been pointing to a change in the property catastrophe insurance market for some time and now the market appears to be in transition away from the soft conditions that have prevailed over the last four years,” said David Pagoumian, NAPCO CEO. “As we noted in the fall of
2010, rising ratios and a decline in reserve releases were a sign of an underlying shift in market dynamics. New developments in 2011 have now put unexpected pressure on industry reserves.”
Catastrophe losses, including the massive earthquake and tsunami that struck Japan in mid-March, have reached an estimated $52.6 billion in the first quarter alone, compared with just $37 billion in all of 2010, the report notes. In addition, insurers are implementing a new hurricane model release by catastrophe modeling firm RMS earlier this year. These developments are pushing underwriters to be more cautious with their capital.
The report advises brokers to build a strong bargaining position so they can direct the deployment of catastrophe capacity in way that is advantageous to all parties, and use capacity from multiple underwriters in multiple markets, including the U.S., London, Bermuda and continental Europe.
Deteriorating Underwriting Profitability
The insurance industry entered 2011 with an abundance of capacity as 2010 investment gains helped drive both net income and policyholder surplus higher. However, underwriting profitability continued to deteriorate.
• First quarter 2011 net income fell to $7.8 billion from $8.9 billion due to underwriting losses.
• Net losses on underwriting increased in 2010 and continued in the first quarter of 2011, while
the combined ratio deteriorated to 103.3 percent in the first quarter, compared with 102.4
percent in 2010 and 101 percent in 2009.
• Releases of prior year reserves helped to bolster earnings over the last two years, but these reserve releases appear to be coming to an end.
Impact of Catastrophe Losses on Renewals
Global catastrophe losses of more than $52.6 in the first quarter, including the Japan earthquake and tsunami, New Zealand earthquake, and Australia floods and cyclone, far exceeded $37 billion in all of 2010. Second quarter losses were also significant, including the Joplin, Mo., tornado, Midwest flooding, and Texas and Arizona wild fires. The arrival of the 2011 Atlantic hurricane season is anticipated to have storm activity well above average.
• The first quarter of 2011 was the worst quarter ever for the facultative reinsurance market in terms of loss experience, reversing the trend toward facultative rate reductions and leading to potentially higher pricing in the most impacted territories during 2011.
• Global property catastrophe reinsurance rates during mid-year contract renewals for Bermuda reinsurers have risen an average of 8-12 percent.
• Sidecar deals are making a comeback, a sign that catastrophe reinsurance capacity may already be growing scarcer.
Impact of Modeling Changes
A reassessment of inland hurricane risk and pricing is underway after catastrophe-modeling firm RMS released a new hurricane model in late February, including new datasets and scientific developments about building vulnerability.
• RMS expects to see wind risk increase for all hurricane states industry-wide.
• Another catastrophe modeling firm, AIR Worldwide, said its latest hurricane model in 2010 represents the current state of knowledge in modeling inland rates of storm decay.
• A third modeling firm, EQECAT, is scheduled to release an update to its North Atlantic Hurricane model in July 2011.
As accounts prepare to renew their property catastrophe coverage this year, they will encounter a market that is less willing to compete by handing out price reductions. Intermediary brokers who understand the latest developments in the rapidly shifting market, can help guide accounts to the
best outcome possible.
• Create competition by using capacity from multiple markets and avoiding reliance on just one underwriter.
• Develop long-term relationships with underwriters, thereby providing protection when the market hardens and capacity becomes scarce.
• Deliver a well-prepared submission based on accurate and extensive information.
NAPCO (www.napcollc.com) is a leading wholesale broker of commercial property and casualty insurance coverage. The company provides retail agents and brokers with an efficient, singlesource independent marketing arm for difficult placements that have significant property and casualty exposure. NAPCO utilizes in-depth research and sophisticated risk modeling to implement coverage and cost- effective programs for its clients. Headquartered in Iselin, N.J., NAPCO provides access to the global insurance market, including major and specialty domestic carriers, excess and surplus lines markets, re- insurers and international providers of capacity.