Posted on 28 May 2009
The commercial property catastrophe market is being stretched to its limit, said David Pagoumian, chief executive officer of Napco, a New Jersey-based wholesale broker of property insurance for commercial accounts.
"The current state of the market is indicative of where the economy is," Pagoumian said during an interview with BestWeek. "Underwriting companies ... have pressures from the economy that are causing them to think differently about how they deploy their cat capacity. The rating agencies are making sure their aggregations are in order. It's a combination of measuring what their exposures are on the hot zones, and deploying that capacity to useful accounts that are giving them the best return."
Pagoumian said the market was at its "maximum output."
"I would summarize the marketplace as being at the highest stretching point. If you would use the analogy of a rubber band, and take that and pull it to the tension of right to before it snaps perhaps what could make it snap is a large cat, either a California earthquake or a hurricane storm this season," Pagoumian said.
However, the market is a also "little inconsistent," now, he said. While some companies are providing reasonable renewal terms and prices, others are looking to drastically change rates. Some accounts are seeing rate increases of 20% to 30%, especially in areas prone to catastrophes such as hurricanes and earthquakes. Some customers who've experienced losses are seeing rates rise by as much as 50%.
Earthquake risks are being especially hit hard, Pagoumian said. He said because hurricanes occur more often than earthquakes, cat modelers have learned more about hurricane risks than earthquake risks. Earthquake risk is California is seeing the brunt of the rate hikes, but other earthquake risks, including the Pacific Northwest, the New Madrid fault in the South/Midwest and even the Ramapo fault in New Jersey are seeing some increases, he said.
The biggest increases overall are California earthquake risk and Florida hurricane risk, Pagoumian said. But, rates vary from place to place. "You're not going to get the same rate if you are placing Seattle quake versus New York quake," he said.
Pressure on rates is pushing customers to shop around more, and speak with more brokers and more insurers, Pagoumian said.
For a number of accounts where underwriters are looking for increases, "The money just is not there," Pagoumian said. Customers "are looking to reduce their insurance costs."
Napco has its own cat modeling department, and will review customer's insurance programs to see if they should buy more cat insurance or retain more risk themselves. "We see a lot of improvements in the way risks are underwritten," Pagoumian said.
The marketplace is global, so there is capacity available all over the world, Pagoumian said. This gives brokers the opportunity to place the right risk with the right underwriter.
"Placing property catastrophe risk is no different than building a Lego," Pagoumian said. "What you want to do is take the pieces of capacity that underwriters are the most comfortable doing. They saying is, `if they are comfortable doing it, they will give you better terms.'"
Sometimes a piece of a program is not aligned right, "and it's the brokers' job to come in and correct that," Pagoumian said.