After the hit insurance companies took in 2011, businesses are continuing to experience changes in the property market in 2012.
“Companies can expect modest upward rate pressure due to severe global property losses back in 2011,” says Rick Miller, managing director of the National Property Practice for Aon Risk Solutions. “Capacity remains stable and some increased underwriting discipline is apparent, particularly around the peril of flood.”
Risk Management Solutions’ (RMS) latest version of catastrophe modeling software is estimating increased damage impact from Atlantic-based tropical storms from Texas to Maine. Miller says the new software has translated to many underwriters pushing for higher pricing for exposures subject to losses from tropical storms.
Smart Business spoke with Miller about what is happening in the property market and what new developments companies should expect to see this year.
What kind of market conditions can businesses expect as a result of recent developments, and who will be most affected?
Businesses can expect a modestly firming property market for natural catastrophe — exposed risks (windstorm, earthquake and flood) and generally flat pricing for all other risks. Windstorm and earthquake are more geographically predictable: Gulf Coast and Eastern Seaboard for windstorm, and California and Pacific Northwest for earthquake, while flood-prone areas exist in every U.S. state.
The newest versions of catastrophe modeling software contemplate more severe losses further inland for windstorm than previous models. While global earthquakes have been severe over the past couple of years, the U.S. property marketplace has only been minimally impacted.
Earthquake risk in the U.S. is more commonly associated with the West Coast, but Virginia had a moderate earthquake felt from Washington to Boston this past August. There are seismic areas in the middle of the U.S., as well.
The 2012 Atlantic Hurricane forecast is for lower-than-normal tropical storm activity.
What is behind the firming market?
The biggest drivers behind the firming property market and the resulting upward price pressure are insurer-incurred losses and lack of profitability. Most large property carriers suffered significant losses in 2011. Year-to-date losses in 2012 have been low compared to 2011.
The good news for businesses looking for property coverage is industry surplus or capacity is near historic highs. Buyer demand has been, at best, flat, following a few years of a slow economy. Strong supply and lagging demand have maintained a relatively competitive pricing environment despite the recent lack of profitability for insurers.
How quickly will these changes occur?
We saw modest upward pricing pressure the last two quarters of 2011. That’s not to say that if you look at the entire portfolio of accounts that all received an increase. Certainly, accounts that are more challenging from an exposure perspective, or those that have had losses, have already seen pricing pressure.
Most natural catastrophe property business renews in the first two quarters of the year, as these buyers do not want to be in negotiations during hurricane season June through November. Many large businesses say, ‘I don’t want to be in the market buying insurance if there is a big storm coming.’ You lose negotiating ability and potentially are exposed to reactive market behavior.
The flip side to that argument is that if there isn’t a big storm, you might have a market that is keener to do business; however, most buyers still choose to renew their property insurance in the first two quarters.
Accounts renewing in the first two quarters of 2012 experienced slightly more upward rate pressure than what was seen in 2011. The increase for most accounts was less than up 10 percent on rate. Some accounts that renewed in May or June had already experienced increased rates when they renewed last year and that reflected in less upward pressure than accounts that renewed in the Q1 and early Q2 of 2012. Absent a significant loss event such as a land-falling hurricane or earthquake in 2012, we expect rates will moderate and increased competition will return in 2013.
How will new developments affect limits, deductibles and coverage?
As far as limits, deductibles and coverage, we expect the market will remain generally stable. Some increase in underwriting discipline is likely to be felt in respect to coverage, limits, deductibles and pricing for commercial flood coverage (not the national flood insurance program).
What new products and services have been developed for the property market, and how can these benefit companies?
Aon has developed bed bug and rent protect insurance products. The bed bug product can provide cleanup/extermination and loss of income coverage to a variety of businesses and has seen the most interest from the hospitality and real estate industries.
The rent protect product can help real estate owners protect their income stream from tenants that default on their obligations.
Rick Miller is managing director of the National Property Practice for Aon Risk Solutions. Reach him at (617) 457-7707 or firstname.lastname@example.org.
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