The property insurance market remained relatively stable and competitive in the first quarter of 2013, with few changes to limits purchased and deductibles. Despite being the second-costliest storm in US history, Superstorm Sandy, which hit the Northeast in the fall of 2012, has not been a market-changing event in terms of rates. It has, however, prompted underwriters to closely scrutinize terms and conditions - particularly those related to flood and storm surge.
- Property insurance limits and deductibles remain stable, indicative of a competitive marketplace, with the exception of insureds in the Northeast and those with significant flood exposures.
- Superstorm Sandy has not had a significant effect to date on property insurance rates as a whole.
- Underwriters have sought to change terms and conditions following Sandy, with a particular focus on the distinction between flood and storm surge and on deductibles.
Limits and Deductible Remain Stable
Seventy percent of Marsh clients in the United States renewing their property all-risk programs in the first quarter of 2013 had no change in limits or purchased lower limits (see Figure 1). The overwhelming majority - 84% - of clients renewing in the first quarter also had no change in deductibles (see Figure 2).
These trends are consistent with a competitive property insurance marketplace, with some specific exceptions in the wake of Superstorm Sandy. Changes in terms and conditions sought by underwriters are generally limited to the Northeastern US and insureds elsewhere with significant flood exposures.
Property Rates Remain Competitive
In the past, property insurance rates have typically spiked after major catastrophic events, such as Hurricanes Katrina and Ike and the Christchurch and Tohoku earthquakes (see Figure 3). The post-Sandy rate environment has, to date, been relatively stable, with the major effects of the storm coming in the form of changes to deductibles, limits provided, and policy definitions. Average renewal rates in the first quarter were up 3.8% for insureds without catastrophe exposures, almost flat for moderately catastrophe-exposed programs, and up 3.6% for insureds with significant catastrophe exposures (see Figure 4).
Clients in the Northeast saw more sizable rate increases in the wake of Sandy and 2011's Hurricane Irene. The stable rate environment in part reflects that rates that had been rising steadily for some time in more catastrophe-exposed parts of the country have now reached a plateau. It is also reflective of the ample capacity in the market, which has kept rates competitive.
Overall, insurers have had enough capital to absorb losses related to Sandy, and most are not likely to reduce capacity for the remainder of 2013, barring unforeseen events. With capacity remaining high, rates in the second quarter are now beginning to soften.
Underwriters Continue to Scrutinize Terms and Conditions
As to terms and conditions in property insurance policies, underwriters are focusing on the distinction between flood and storm surge. Some policies may state that "storm surge" is included within the definition of "flood," while others consider it part of the "named windstorm" definition. This distinction may determine the available limit and the deductible that will apply to the loss.
This scrutiny of definitions and deductibles related to windstorm, flood, and storm surge is expected to continue for the next several months. Underwriters may also extend this discussion to consider whether tsunami belongs under the definition of either flood or earthquake. Risk managers should work with their insurance advisors to achieve "contract certainty" - achieving a clear understanding of how various perils are defined under their policies.
Insureds facing upcoming renewals also should work with their advisors to review their property coverage, limits, sublimits, deductibles, policy definitions, and replacement cost valuations. Those risk managers that can effectively differentiate themselves from their peers by providing the most complete underwriting submissions with accurate and high-quality data will be best positioned to secure more favorable terms, conditions, and pricing where possible.
About This Briefing
This report was prepared by Marsh's US Property Practice, which assists clients in identifying the full spectrum of their property exposures and provides solutions to help them avoid, mitigate, or transfer their risk.