Risk Management

Property Insurance’s Uneven Price Blip

Except for companies in storm-prone areas like Miami, the increase in premiums will likely be short-term.
David KatzFebruary 9, 2006

Ever since Hurricane Andrew struck Florida in 1992, Scott Clark, the risk and benefits officer of the Miami-Dade County Public Schools, has found it tough to buy enough property insurance to cover the system’s physical assets.

After that storm, which caused the schools a $96 million loss, Clark struggled for years to assemble the $700 million in coverage — especially windstorm-damage insurance — he felt the organization needed. By 2001, he had reached his goal — only to see insurers refuse to lower their ceiling to $200 million following the September 11 attacks. Since then, he’s gradually managed to convince a bevy of insurers to build the system’s coverage back up to $700 million.

Following the 2005 hurricane season — in which Miami was battered by Katrina, Rita, and particularly Wilma — things have gotten difficult again for the risk manager. After conversations with his brokers, Clark says he’ll be lucky to get half the coverage he’s hoping for when he renews the system’s policy on May 1. What’s more, to pay for it, Clark thinks the schools will have to shell out 25 to 30 percent more than they did last year.

He’s not alone. After two years of cut-rate prices, in 2005 hurricanes inflicted an estimated $58 billion in losses on the insurance industry and began prompting carriers to charge a good deal more for property insurance. According to a new survey, in the fourth quarter of 2005, commercial property-insurance buyers faced a median price increase of 8 percent, and at least one buyer was slapped with a 33 percent hike. The survey — sponsored by the Risk and Insurance Management Society and conducted by research firm Advisen — was based on information provided by risk managers on 42,000 corporate insurance programs.

Except for organizations in storm-prone areas like Miami, however, the upturn in premiums will likely be short-term. Large as the hurricane losses were, experts say they represent a ping rather than a dent in the insurance industry’s $414 billion in claims-paying surpluses.

Despite the fourth-quarter rate hike, property insurance prices declined 2 percent overall in 2005, following a 6 percent drop in 2004, according to Advisen editor-in-chief Dave Bradford, who oversees the annual survey. Citing a more pervasive downward pressure on rates, however, Bradford is convinced the recent upsurge is “a short-term blip.”

Why won’t premiums continue to rise? The answer, simply put, is that the property-casualty-insurance industry is flush with capital, storms or no storms. That means there’s an abundance of supply relative to demand, setting the stage for continued low prices.

Prime evidence of insurers’ well-stocked reserves is a whopping policyholders’ surplus — the amount by which assets exceed liabilities and the main gauge of claims-paying ability. The surplus stood at about $414 billion last September 30, more than a month after Hurricane Katrina hit. That’s 5 percent more than the $394 billion at the end of 2004, according to the Insurance Services Office — the industry’s data-gathering organization — and the Property Casualty Insurers Association of America.

Part of the reason that surplus weathered the storms so well is that previously, the property-casualty industry had laid off large portions of its risk on reinsurers. Some insurers have more than 60 percent of their gross hurricane losses covered by reinsurance, according to a report by Robert Hartwig, senior vice president and chief economist of the Insurance Information Institute.

Another major source of claims-paying capacity has been insurers’ ability to raise fresh capital quickly. In the wake of Hurricane Katrina’s onslaught last August, Hartwig notes, by December 1 fully 19 insurers had reported plans to seek a total of $10 billion in new funds. Further, 12 new insurers and reinsurers (11 of them in Bermuda) had been formed over the course of the year, with a startup capitalization totaling $8.7 billion. In all, the industry will have raises about $23 billion dollars in post-Katrina capital by the end of February, according to Hartwig. That’s about 60 percent of insurers’ aggregate after-tax losses incurred during the 2005 storm season.

All that capital is also preventing storm losses from having a dramatic effect on insurers’ other lines of coverage. For example, fourth-quarter pricing for general liability insurance was down 3 percent, according to Bradford; directors’ and officers’ liability premiums stayed flat in the fourth quarter after averaging a 7 percent decrease in the previous three quarters. For the year as a whole, however, D&O displayed the same disconnect between losses and pricing that property insurance has, according to another survey.

Still, insurers aren’t likely to extend the fruits of their good fortune to companies with property in high-risk locales. “For big placements like my own in catastrophe-prone areas,” says Clark, “it’s going to be harder and harder to procure windstorm property insurance.”