Insurance Rates Drift Downward
Sammer, Joanne, Business Finance
As the insurance industry continues to recover from Hurricane Katrina, business insurance buyers are finding more demanding underwriters. But softer prices overall mean good news.
HURRICANE KATRINA DELIVERED A stunning blow to the insurance industry, but a quiet hurricane season in 2006 did a lot to pull the industry back on its feet. Nevertheless, the property-insurance market continues to be a mixed bag, even as other lines of coverage show promising softness for 2007. "Overall, prices have been improving for buyers since the end of 2004," says David Bradford, executive vice president of Advisen Ltd. in New York City, adding that he expects prices to continue their gradual decline in 2007. Although a softer market is welcome news for companies, they should not expect the kind of freefall in premiums that in the past allowed them to greatly reduce risk-retention levels.
Even as the market softens in general, the lessons of Katrina have prompted insurance companies to become more diligent in their underwriting and to press business insurance buyers for more information and more detail than has been their custom over the past decade. "This is more like the old days when underwriters wanted more complete submissions before writing coverage," says Suzanne Swafford, vice president with CBIZ Insurance Services Inc. in Denver. "Buyers will need to spend more time on coverage acquisition and provide underwriters with all of the pieces of the puzzle to help them completely understand the buyers' business."
The Property Insurance Market
The Risk and Insurance Management Society (RIMS) Benchmark Survey, conducted in conjunction with Advisen Ltd., found that insurance premiums fell slightly during the third quarter of 2006. Property insurance, the only line of coverage that climbed, did so by 1.7 percent. That low net increase resulted from a sharp spike in coverage for coastal property and property located in earthquakeprone regions offset by a decline in premiums for property in areas that are less vulnerable to natural disasters. The good news is that even though property in coastal areas and earthquake zones still faces very high premiums, those prices have leveled off.
In this challenging property insurance market, Clifton, N.J.-based retailer Linens 'n Things Inc. found it difficult to retain the terms and conditions of its property coverage when it negotiated its 2007 policy renewal, says Michael Mital, the company's director of risk management. "To maintain those terms and conditions, including earthquake coverage in California and windstorm coverage in Florida, we had to take on more exposure and greater retention levels," he says. "That was our choice in order to keep costs down."
Going forward, Mital is concerned about how insurers will react if there is another bad weather cycle in 2007. He recalls how much his company's property premiums jumped after hurricane Katrina even though the company did not submit Katrinarelated claims. "The wild card in the market to me is the knee-jerk reaction by insurers to any weather catastrophe," says Mital.
The Catastrophe Market
For catastrophe coverage, the picture is a bit murkier. On the one hand, catastrophe exposures, including windstorms, hurricanes, floods and earthquakes, are still difficult to place. The market continues to deal with the lingering impact of recent hurricane seasons even though 2006 was notably free of catastrophic storms in the United States. "Insurers have developed new catastrophe loss models that justify their need for significant premium increases and higher deductibles with certain catastrophe risks," says Martin S. Berman, a principal with Albert Risk Management Consultants in Needham Heights, Mass. "Some businesses in the most highhazard wind areas have experienced premium increases of 400 percent or more with deductibles normally mandated at 3 to 5 percent of values."
On the other hand, some see change afoot - even in the market for catastrophe coverage. …