Risk Management

Property Insurance Glut Forces Prices Down

A leading brokerage forecasts rate decreases of 5 percent or more.
David KatzJuly 10, 2013

Property insurers are looking past the devastation wreaked last year by Superstorm Sandy and this year by the Moore, Okla. tornado and see smooth sailing ahead. As a result, they are flooding the market with insurance supply, according to a market update released today by Willis, the big insurance broker.

The result? Cheaper premiums. “In the past year, we were in a rate-increase environment; now we’re in a rate-decrease environment,” David Finnis, the national property practice leader for Willis North America, told CFO. “As new capacity enters the market, the question is: What [insurance] partners is the CFO going to want on a go-forward basis? That CFO is going to have options.”

After experiencing property-insurance rate movements ranging from a 5 percent drop to flat in the first two quarters of this year, companies not subject to property losses stemming from natural catastrophes can expect to see decreases of from 5 percent to 10 percent over the remainder of 2014, according to the update.

For companies with facilities in catastrophe-prone areas (not including ones hit by Sandy), premiums ranging from flat to a 5 percent increase in the first and second quarters will drop to a range of flat to a 5 percent decrease, the brokerage predicts.

The plummeting of property-insurance prices will be helped along by the emergence of five new players in the market, according the report. On June 13, for instance, Berkshire Hathaway announced that Berkshire Hathaway Specialty Insurance, a commercial property-casualty insurance group, began operations. Mainly an underwriter of so-called “excess” coverage, which kicks in after an initial layer of losses, the new unit is serving up insurance for property losses of from $15 million to $50 million, according to Finnis.

Also moving into the U.S. property-insurance market are the People’s Insurance Company of China and China Pacific Insurance, which typically will take 10 percent of the coverage existing above a minimum of $10 million, the broker says.

Finally, two new broker-driven underwriting facilities are entering the fray. First, there’s the Aon-Berkshire Hathaway Facility, in which Aon, the insurance brokerage firm, places 7.5 percent of the coverage it brokers at Lloyd’s of London with Berkshire. In the works is Willis 360, in which Willis will begin placing property insurance policies with a panel of insurers, Finnis says.

All that new insurance capacity is coming in on top of an already-overstuffed market. As a result, most accounts carried by bunches of insurers are “oversubscribed” by more carriers than are needed, according to the update.

That means that CFOs and risk managers have the opportunity to pick carriers “with the most aggressively priced premiums” from among the group, says Finnis.

Why are insurers betting so much on a market that has seen, and perhaps stands to see, such heavy storm damage? Besides the East Coast hurricane and the Oklahoma tornado, the damage from natural catastrophes has been rather light, the broker noted.

What’s more, the likelihood of the Federal Reserve raising interest rates means to these insurers that the value of their investment-income portfolios will rise. “They’re under the impression,” Finnis says, “that they can make money.”