The following is a guest post written by Michael Korn, managing principal at Integro Insurance Brokers and a senior member of the firm’s property insurance practice.
Australian floods, a New Zealand earthquake, Japan’s earthquake and tsunami, tornadoes and flooding in the Midwest and South, and the exceedingly rare tornado in the Northeast that ripped through Massachusetts lead a long list of catastrophic events that have hit the property insurance industry hard in just the first six months of 2011. They may claim yet another victim — soft insurance premium rates.
Making matters worse, there may be little time to absorb the first-half barrage. Risk Management Solutions (RMS) 11.0 is sending shock waves through wind exposed insurer and insured portfolios. Windstorm prognosticators are predicting an “above average” number of hurricanes this season, which officially began June 1, supporting growing speculation the market is about to harden. Are observers prescient or wrong?
To look ahead, let’s briefly look back. For a number of reasons, including the vast amount of available capacity, the types and locations of the catastrophes we’ve experienced globally and the delayed implications of potential contingent time element losses not yet realized, the commercial insurers have proven incredibly resilient in their ability to absorb billions of dollars in losses. However, you begin to get the sense that the hard market bow has been stretched back to nearly its limit and just one medium-sized storm could be enough to spring the arrow.
So far, we have seen a wide range of insurer reactions to the untoward first-half 2011 events. For incumbent carriers, the days of rate reductions are almost universally a thing of the past. Taking their place, most carriers are now looking for flat or modest increases in rates. Still others are looking for significant increases, especially if the insured portfolio is heavily wind exposed. Carriers looking at new opportunities appear to be the exception; they’re still being aggressive. Against this backdrop, there continues to be enough capacity for most programs to encourage new players and counterbalance the incumbents looking for increased pricing.
Bear in mind, new capacity that can counter the push for higher prices is not a phenomenon that can or will last forever. Rating agencies’ intensifying scrutiny of insurers and their plans to manage increased modeled portfolio loss estimates will inevitably lead to a reduction in capacity offerings. July 1 CAT treaty renewals have seen prices rise — a dramatic reversal after many years of reductions. Some insurers will buy less reinsurance to save money while others will pass on the premium increases to the ultimate buyer, the insured.
A hard market is not a great environment for insurance buyers, of course. But there are some things risk managers might do to help ease the pain of the expected market swing. Knowledge is the coin of the realm.
Consider several suggestions:
- Know how the models work and your “probable maximum loss.” Gather secondary modeling characteristics and run those. Many insurers use default settings generating a higher PML than when accurate specific data is input; this could make a difference in the amount of capacity offered and the price.
- Know how your deal is structured. Is there facultative reinsurance being purchased? How much? Who’s broking that on your behalf? How much does it cost?
- Take care of the inexpensive outstanding human element recommendations that will make you a better risk.
- Dust off the business continuity plan and update it. Bring in your supply chain folks and if they have a good story to tell, get them in front of your insurers to tell it.
- Diversify your insurer portfolio if possible. Utilize the markets in the U.S., Europe, Lloyds, Bermuda and Asia to spread your risk. Each of these markets moves at a different pace and will increase the flexibility of your program.
Taking these steps to proactively manage the insurance cycle risk will put you in a much better position if and when the wind does blow.
