The U.S. Property Insurance Market at Midyear: Mild CAT Losses Help to Rein in Rate Increases
By Michael Hudson, Marsh’s Property Practice Placement Leader
Catastrophe losses in the first half of 2012 were moderate compared to last year. According to Munich Re, global losses in the first half of the year totaled $26 billion, $12 billion of which were insured losses. This figure is down significantly from this time last year—and below the 10-year average—when total economic losses had already eclipsed $300 billion. Nearly 85 percent of 2012’s losses to date were in North America, mostly due to storm damage in the United States.
Most of the losses this year are attributable to wildfires, tornadoes, and severe thunderstorms in the United Sates. The relatively mild winter experienced in the majority of the United States resulted in little spring flooding, which helped to moderate total economic losses. However, the lack of snow and rainfall have contributed to drought conditions across the U.S., creating ideal conditions for wildfires, such as the devastating wildfire in Colorado in June, the most severe and damaging wildfire in the state’s history.
Unlike years past, when the Atlantic hurricane season produced above-average numbers of named storms, experts have predicted a more moderate season in 2012. A total of 19 named storms—including seven hurricanes, four of which were major (Category 3 or above)—formed in 2011, including Hurricane Irene, which was the first to make U.S. landfall since Ike in 2008. These figures represent the third-highest total since recordkeeping began in 1851.
Most forecasters have predicted a slightly below average to near normal hurricane season in 2012. Despite the favorable forecast, it is important for companies to be prepared in the event of a windstorm or other natural disaster. A technically “low activity” season can still produce high losses, particularly if a storm makes landfall near populated areas.
Rates Continued to Rise Through First Half of 2012
Pricing of property insurance programs has continued to rise during the first half of 2012, continuing a trend that began in the third quarter of 2010 when the severity of rate decreases began to decline. Generally speaking, insurers are seeking premium increases on most accounts.
Sixty percent of Marsh’s clients that renewed in the first half of 2012 experienced a rate increase of some kind; another 15 percent secured flat renewals. While this clearly shows an upward trend, one out of every four clients were able to achieve rate decreases at renewal, according to data from Marsh’s Global Benchmarking team.
Therefore, although not as prevalent, rate decreases are available for certain insureds, typically those with no recent or historical losses, little to no catastrophe exposure, low-risk occupancies with superior construction and protection features, and/or those that submitted complete, accurate underwriting data.
Historical Property Rate Changes by Quarter—All Programs
As illustrated the chart above, despite beginning to moderate late in 2010, the property insurance market remained relatively soft through the third quarter of 2011. Insurers pushed harder for rate increases in the wake of the Japan earthquake and tsunami in March 2011, as evidenced by the average/median rate changes in the fourth quarter of 2011 and the first half of 2012.
Overall, rate increases averaged 3.8 percent in the first half of this year while the median increase was 3.1 percent. It is important to note that some insureds may have elected to change terms and conditions and/or alter deductibles or limits in order to mitigate any rate increases.
Breaking this down further, Marsh’s benchmarking data showed average rate changes for catastrophe (CAT) and non-catastrophe accounts in the first half of 2012 were as follows: CAT-exposed organizations saw average increases of 5.5 percent and non-CAT accounts experienced 3.1 percent average increases in rates. Catastrophe-exposed accounts are defined as those with 25 percent or more of an insured’s total insurable value (TIV) in California earthquake and/or Wind Tier 1 zones.
Property Rate Changes First Half 2012 By Catastrophe Exposure
Although these rate changes seem relatively modest, these are averages based on all of Marsh’s property clients and may not be indicative of an individual company’s experience. Approximately 25 percent of high CAT-exposed accounts saw rate increases greater than 10 percent in the first half of the year. Even considerably CAT-exposed U.S. companies without losses generally experienced increases between 10 percent and 20 percent.
The moderate tightening of the market is expected to continue through the second half of 2012. If the low frequency and severity of natural disasters continues as it has in the first half of the year any significant increases may be mitigated. However, a single event—such as a hurricane making landfall in the United States, a rash of severe thunderstorms and/or tornadoes, or continued devastation from significant wildfires—may spur a further tightening of the market and renewed upward pressure on rates from insurers.
Property Insurance Market Trends
The Atlantic Hurricane Season
As mentioned, the 2012 Atlantic hurricane season is predicted to be at or near historical averages, unlike the near record-setting 2011 season. In June 2012, Colorado State University revised its earlier forecast and is now predicting 13 named storms, including five hurricanes and two major hurricanes (Category 3 or higher). This is in line with the National Oceanic and Atmospheric Administration (NOAA), which forecasted nine to 15 named storms, including four to eight hurricanes and one to three major hurricanes. According to the CSU team, an average storm season is defined as approximately 12 storms, six hurricanes, and slightly fewer than three major hurricanes.
Despite this somewhat favorable forecast, the season got underway early. Tropical Storms Alberto and Beryl formed even before the official start of the season—officially from June 1 to November 30—and a total of four storms formed before July, a first in well over 150 years. Fortunately, as of August 1, 2012, only those four named storms have formed and none have caused significant damage.
National Flood Insurance Program
On June 29, 2012, the U.S. Congress passed a sweeping bill that includes a five-year extension of the National Flood Insurance Program (NFIP). President Obama signed the legislation into law on July 6, 2012.
Under the bill—known as the Biggert-Waters Flood Insurance Reform Act of 2012—the NFIP is reauthorized until September 30, 2017. Perhaps most importantly, the bill includes a series of reforms designed to improve the program’s fiscal stability. The bill is intended to make premiums for flood insurance better reflect the risk of a loss, update and improve flood maps and public notification, and establish steps to mitigate against repetitive losses.
Key highlights of the legislation include:
- Effective July 1, rates for second homes, properties with repetitive flood claims, and commercial properties will go up 20 percent over the next five years.
- Premium rates can increase a maximum of 20 percent annually (up from 10 percent annually).
- Lenders are now required to accept non-NFIP backed flood insurance coverage if that coverage meets all the same requirements as NFIP-backed flood insurance.
- Multifamily residential building owners—those with 5 or more units—will be able to purchase flood insurance up to the commercial coverage limits, which is currently $500,000 per structure (note an implementation date has not yet been set for this provision).
- Authorization of $400 million annually for mapping, including requirements to establish meaningful standards for updating and maintaining maps and to enhance communication and outreach to states, local communities, and property owners regarding mapping changes and mandatory purchase requirements.
Marsh’s Property Practice holds frequent meetings with major U.S. and global property insurers to discuss industry conditions and market-specific issues that may impact our clients’ overall property programs. The following are some trends to consider:
- Capacity: Overall, most carriers’ net and treaty capacity remain unchanged. Insurers said they were not cutting back on the limits they are able to provide nor on the number of accounts they will consider writing. However, as a result of the Japan earthquake and Thailand floods, some insurers did indicate they may impose significant sublimits on ancillary coverages, such as contingent business interruption or flood.
- Pricing and Models: As the industry continues to adopt a more rigorous underwriting approach based on modeling, actuarial science, and financial analysis, insurers are likely to continue to put upward pressure on rates. Nearly all carriers are now using RMS 11.0 and/or AIR Worldwide (a few use their own models, which are typically based on hybrid versions of the other two). While in the past a relatively unscientific approach to the use of the data developed by the model was common, this is no longer the case, and the new methods are being driven in part by the rating agencies and the application of financial models.
All models use COPE (construction, occupancy, protection, and exposure) data provided by the insured, including street address, year built, number of stories, construction, and occupancy. When available, secondary modifiers for specific construction features for earthquake and wind are also used. The results from the RMS or AIR model are used as the basis of the pricing model, and formulaic adjustments are made to account for insurer operating expenses, return on equity, non-catastrophic losses, and other factors. One of the significant adjustments to the pricing model uses the standard deviation predicted by the model relating to the completeness of the data input. Therefore, while it is possible to model a risk without full COPE data, the pricing program will significantly elevate the premium requirement if the data is incomplete. Simply put, the more complete the data, the lower the price.
- Contingent Time Element: With few exceptions, contingent time element (CTE) coverage had become almost a throw in for most property insurance policies. Historically, it was not uncommon for insurers to offer coverage of CTE (usually contingent business interruption) to the limit of an insured’s property program, and to include direct and indirect suppliers and recipients up and down the supply chain. The earthquake/tsunami in Japan and the Thailand floods have served notice to the insurance industry that contingent time element is a very real loss exposure, and carriers are now looking at how best to limit their exposure. Although there has not been significant movement on the issue yet, it is under serious discussion, and we are seeing sublimits and requests for additional contingent exposure information.
- Flood: The sophistication of the U.S. flood insurance market (including detailed flood maps and the NFIP) does not extend to all geographies worldwide, and the industry has wrestled for years with the proper way to provide flood coverage for global policies. The inadequacy of the current method has been brought to light by the Thailand floods and resulting losses, and as with the issue of contingent time element above, while the market reaction has not been severe, the topic is under discussion. Some carriers are moving to limit their special flood hazard area (SFHA) exposures on every account.
Most insurers began using RMS 11.0 this time last year. As a result, they have now been through one full renewal cycle, and have made adjustments to their pricing which were necessitated by the new modeling results. According to Guy Carpenter, reinsurance treaty capacity remains stable, and pricing in the first half f 2012 is up only slightly on average. The industry is profitable due to the relatively low catastrophe losses so far this year, and, in combination with the other factors above, a stabilizing of pricing seems to be starting. Absent any catastrophic insured events, this should continue for the foreseeable future.
To learn more about how the current property market environment may affect your company’s insurance programs, please contact your local Marsh representative to schedule an appointment with our dedicated and knowledgeable property experts.
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