Catastrophe Insurance In 2011

Where the risk characteristics limit available carriers (due to restrictions on age, soil, etc.), there will be pressure to get increased rates.|

Is the catastrophe market firming up or not? What will happen to my renewal in November? What did the Japan Earthquake do to the market? Agents and brokers who work in the Catastrophe (CAT) insurance market field these questions every day and give many different answers. I will try and break this down looking at three main variables that may have the greatest impact on pricing with a focus on West Coast Earthquakes (EQ). Losses The fact is that catastrophe losses and their impact on pricing need to be looked at from a global perspective. In other words, even if we have not suffered a major earthquake in California for twenty years, we are subject to changes in the marketplace due to all insurable catastrophe losses worldwide. There are primarily two reasons for this. First, many of the largest carriers and/or their affiliates write business in Asia, South America, and Australia, and the reinsurance treaties purchased by these carriers are also provided by international markets that are exposed to those events. Second, most carriers purchase catastrophe reinsurance treaties on a combined basis that incorporates the perils of Earthquake, Wind and Flood. So a large earthquake in Japan, a flood in Australia, or an earthquake in New Zealand can impact Earthquake pricing in California. Early in 2010, the thought was that it would take insurable loss amounts higher than the 2005 Hurricane Season to "harden" the catastrophe market (estimated insurable losses are at $75 billion for the three largest hurricanes — Katrina, Rita and Wilma). In the last twelve months, total insuranble losses from earthquakes, floods, wind/hail storms, tornadoes, etc. are estimated to be in excess of $85 billion and will likely exceed $100 billion as losses develop Catastrophe Modeling All insurers and reinsurers use some form of Catastrophe modeling to help control aggregates, price amounts, and report information to their respective reinsures and to rating agencies such as A.M. Best. One of the most widely used models is RMS (current version is 11.0) which provides analysis tools for major natural Catastrophes including Earthquake, Wind and Flood. As development of Catastrophe losses takes place, and more information is available to modeling companies regarding how each location, building, construction type, roof type, type of soils, etc. performs in the event, this information is downloaded into the model to further refine its capabilities in predicting future performance in similar events. Why is this important? With every change in the Catastrophe model comes potential change in how the results impact each carrier's existing portfolio, and how they will look at future accounts. There was a major change to the RMS Catastrophe model in 2010 with most carriers adopting these changes by July 1, 2011. The general impact of RMS 11, for example, appears to show carriers that their exposures to Catastrophe Windstorm in most of the Southeastern United States is much greater than what they had thought. With their exposures to loss being higher, the potential to loss of surplus is greater, and the potential need for additional reinsurance (at a higher cost) can have an impact on all pricing. Capacity There is a "finite" amount of Catastrophe capacity in the marketplace at any one time. After major insurable events such as Hurricane Katrina, available Catastrophe capacity can shrink by 50% or more. Some of this is due to loss of surplus but most is due to market "loss of appetite" or taking a less aggressive "post event" as shareholders and Boards take a closer look at company portfolios and return on equity. In the current global economic environment, the investment of capital in the insurance industry still seems relatively strong. Even with the string of global losses, as of July 2011, there has been only a slight reduction in available Catastrophe capacity (that was already high) for most accounts, and any new Catastrophe capacity that enters the market helps to keep rates competitive. These three variables work in conjunction with and against each other, all at the same time. The one variable that does not change is individual risk characteristics of the specific account. Pricing and terms are based on how those specific characteristics are perceived against the changing variables of Losses, Catastrophe Modeling, and Capacity. What does this mean as we head into the fourth quarter of 2011? There seems to be enough available Catastrophe capacity that on accounts where individual risk characteristics drive competition, pricing increases have been held to a minimum. On those accounts where the characteristics limit available carriers or capacity, there may be pressure for increased rates. We will circle back around this subject to check and verify how these variables are working in current market conditions at that time.

Jeff Bianchi

Profile picture for user JeffBianchi

Jeff Bianchi

Jeff Bianchi has over 17 years' experience in underwriting, marketing and wholesale brokering. He is a Senior Vice President Property Broker at Swett & Crawford and consistently ranks among the top producers nationally at Swett & Crawford. His focus is on large property placements specializing in Catastrophe coverage including Earthquake, Hurricane, and Flood.

Read More