Caution: Property Insurance Rate Increases Ahead

Not only have Hurricanes Katrina, Rita, and Wilma put unprecedented pressure on the state-backed residual market property plans in Louisiana, Mississippi, Alabama, and Texas, they are wreaking havoc on all areas of insurance. From workers compensation to liability claims, Katrina and the other hurricanes are hitting everyone across the board. Of course, it will be on your property renewal where you’ll feel the biggest effect.

Hurricane Katrina was the most expensive insured catastrophe to hit the US. According to the Towers Perrin report of October 2005, insured losses from Katrina will be between $40.0 billion and $55.0 billion, and is likely to displace the September 11th terrorist attack as the single most expensive insured occurrence in the US to date.

According to several leading industry experts, the primary insurance market will harden, but only selectively. Marine and energy markets will be particularly problematic. Some of the market impact will be immediate, and some will occur more gradually. Just like the primary markets, the reinsurance arena will also be adversely hit, especially catastrophic reinsurance. Hard markets arise out of capacity shortage. With loss estimates around 10% to 15% of the insurance market’s total surplus, there is still enough capital to provide continuing liquidity in the market.

A recent survey conducted by Commercial Insurance Agents and Brokers Association of commercial insurance brokers from across the country shows the impact of Hurricanes Katrina and Rita has been minimal to date, but they are bracing for higher prices, reduced capacity, increases in deductibles, and tighter terms and conditions for property/casualty coverage as a result of the devastating Gulf Coast storms.

This should result in the following:

Windstorm rates should show a spike of 2 to 3 times current pricing - and larger accounts will see their insurers cut back on capacity - at least until new capital enters the market. Therefore, we can expect that it will take 12-18 months for capacity to come on line and prices to ease - unless capacity can be funneled directly in to the existing distribution network, which will speed up the process.

Katrina will also affect earthquake and other lines of catastrophe business. If the loss to reinsurers is past a certain threshold, the reinsurer will pull back to satisfy rating agency requirements, and to improve their short-term rate of return for investors. Given the scope of the losses impacting catastrophe treaties, and the knock-on effect of 1) potential downgrading of Reinsurance companies and 2) companies triggering their reinstatement provisions, there will likely be a flight to quality following Katrina.

Katrina will not only affect your property pricing and capacity on your upcoming renewal:

Carrier Solvency and Credit Issues: As one would expect, the rating agencies are keeping a watchful eye of financial impact that Katrina, et al, will have on the insurance industry. Several carriers will have severely reduced earnings for the year and will have meaningfully impaired capital. In addition, several carriers have been downgraded. A.M. Best analysts have placed 22 companies under review with negative implication. Moody’s is expected to take similar actions.

Limited New Capacity / Capital: Don’t look for more new capital to fall in line as quickly as it did after Hurricane Andrew and 9-11. Both Andrew and 9-11 led to a number of new insurance and reinsurance entering the marketplace. It is important to note that new capital flowed in then, in particular, because the events occurred during or at the end of the soft market, thus attracting more business opportunities. It’s still too early to tell, but this might not be the case after Katrina and Rita. In light of such success raising capital, and given the amount investment community cash sitting on the sidelines, industry experts would expect that there will not be a fundamental structural change in the market. We expect that 9/11 and the 1992 (Hurricane Andrew) and 1994 (Northridge) loss events will be the best guide as to what is to follow.

Liability and Worker’s Compensation Claims: Where these losses were limited in Katrina and Rita, they did amount to over $1 billion. Look for liability underwriters in certain regions to be asking to review your disaster preparedness plans. They’ll also want to know what risk management programs are in place and how are they implemented? This will certainly be true in the Health Care Industry.

London Market: Write the majority of losses from onshore and offshore energy, property, and catastrophe, marine and business interruption. Lloyd announces that losses will be approximately $2.55 billion. While this won’t have a solvency issue, the impact on individual syndicates will be severely affected. Look for your marine, cargo and reinsurance rates to increase 10 to 15%.

Please contact Michael Marcon at (415) 874-7101 or mmarcon@equityrisk.com for any further information, questions or comments. We appreciate your continued consideration and support.