Property Insurance: Winds of Change

Winds of Change

Amid pronounced shifts in property market dynamics, agents are finding creative ways to weather the storm

Trying to place a property risk this year in Maryland, Rhode Island, Oklahoma and many other places is tougher than it used to be — and considerably more expensive.

Hard and soft insurance markets have their distinct challenges. But it’s the transitional market, where available capacity is shifting and being reallocated, that allows skillful brokers and insurers to really differentiate themselves. Those who manage to keep pace with changing conditions, and have the knowledge and flexibility to react appropriately, will be in a strong position to emerge from the transition on solid footing.

Property insurance markets have been in flux across the U.S. since mid- 2011. In some markets, carriers are changing their underwriting requirements, dropping good risks or refusing to consider others they traditionally have written, raising rates, decreasing limits, imposing new sub limits and even walking away rather than compromise their positions. Meanwhile, the status quo holds in other markets. But for how long?

This market turmoil has several causes, including changes in a widely used risk model, weather events in the Midwest and several years of extreme underpricing by some providers.

Remaking the Model

In February 2011, Risk Management Solutions (RMS) released a new version of its influential modeling system that, among other things, upgraded hurricane risk in places along the East Coast. After extensive study, RMS Version 11 has gained traction and is being used by many carriers, according to Commercial Lines Broker Stephanie Hilliard in the Burns & Wilcox Tampa office. “Markets are requiring their underwriters to run this model against new business and their entire existing portfolio, which is having a dramatic effect on the type of risk and size of risk they are willing to put out the extra capacity to write,” she says.

The new model isn’t just affecting the standard market. “Lloyd’s has a mandate to run that version of the modeling system against all its portfolios and against any new business, affecting business across the board,” says Hilliard.

The impact is being felt by inland and coastal businesses alike, she observes. “In fact, inland counties (in coastal states) have experienced the highest impact because such high losses were not really contemplated in the prior model,” which focused on coastal events.

The now-infamous tornado that plowed through Joplin, Mo., in May 2011, killing 160 people and costing insurers an estimated $2.8 billion in damage, was another game-changer. Classified as an EF-5 tornado, the most severe, this was the deadliest and most expensive twister in the U.S. since at least 1950. It also focused national attention on tornadoes, which once tended to garner only local media attention, explains Brokerage Manager Dan Brimer of the Burns & Wilcox St. Louis office. In fact, the National Oceanic and Atmospheric Administration (NOAA) reports 1,238 tornados struck 19 states in the first five months of 2011, resulting in $6 billion of insured losses.

“No one had expected this (Joplin damage), but it had a significant impact on the bottom line for a lot of companies,” says Brimer. Minnesota, Colorado, and Oklahoma also were hit hard.

Prior to Joplin, property rates had been inadequate for several years, as some companies departed from experience-based rates with no justification other than to write the business, he adds. So there was a clear effect on earnings and capacity. Then, early this year, a major carrier that had led the push toward lower rates and looser terms announced it was reversing that position, shifting its capacity and moving to tighten underwriting and rates. Others have followed suit, he says, leading to a market shift.

Wrestling with Uncertainty

As part of that shift, standard carriers now are declining the type of business traditionally handled by the excess and surplus (E&S) market, including the accommodations they might have made 18 months ago to win an account, says Vice President Daniel Rossen of Burns & Wilcox Brokerage in Chicago. This makes the broker’s role even more important.

Take the case of a standard carrier that had been writing an entire hotel chain with locations in five states. When the chain came up for renewal this year, Rossen recounts, the insurer was willing to cover everything but the wind exposures at the hotel’s Louisiana and Virginia properties. Nothing had changed except how the carrier defined the exposure — it was now considered “catastrophic,” he says.

Rossen, who has been brokering this account for several years, simply turned his attention to securing quotes from the surplus market for wind at the excluded locations. “In the past, the carrier would have agreed to do a small piece of the schedule with a higher deductible for wind, but now they simply refuse to do it,” he says.

Such market uncertainty can quickly disrupt a complex, layered insurance program, notes Rossen. When change is likely, it’s wise to set up accounts to better withstand whatever the future brings.

For example, an agent had an account in place where the standard company wrote the first layer and Rossen’s office provided a market to cover the remaining limits. Recently, according to Rossen, the largest carrier said it could only provide half the limits it did last year — $60 million instead of the $120 million limit it had written. What to do? In past years, the agent might have looked to simply replace that carrier. This year, however, Rossen will bring in one or two more carriers to fill the gap, thereby limiting the dependence on any one market. “In this market, where capacity is likely to be further constricted, you want to have as many markets participating and tied in as possible,” he explains. “It’s easier to swap out someone in the future who has 15 percent vs. 80 percent of the risk.”

Agents are rightfully concerned when they have to put more than one market on an account. Avoiding gaps in coverage requires skill and knowledge. This is where a savvy broker has an edge, says Rossen. “A good broker will have the expertise to layer and make sure the contracts contain the proper forms and the appropriate dropdown clauses. We do a lot of this in any market.”

Even the best help can fail if time runs out, though. Rossen cautions agents to start working on renewals 90 days ahead of expiration to get everything in place for clients. “Most states require that insurers give a 60-day alert to notify customers if they are raising rates or getting off an account,” he says. By then, the agent should already have spoken with the market, involved a broker where appropriate and figured out the best strategy.

That’s life in a transitional marketplace.