From the March 2010 issue of Florida Underwriter •Subscribe!

Florida's E&S Commercial Property Insurance Market Continues to Seesaw

No news is good news, so they say, and that applies in some ways to the current Florida E&S commercial property market. The absence of Katrina- or Andrew-type events is certainly good news. There is more good news -- at least for consumers -- as rates continue to hold or even fall a bit. The flip side of that is that carriers, brokers, and agents continue to fight for an ever-shrinking market share as a result of business failures, contractions, and lack of funds for insurance at many struggling companies.

According to data from the Florida Surplus Lines Service Office (FSLSO), written premium numbers for the past few years show a very flat profile. In 2009 commercial property taxable premium totaled $1.384 billion. In 2008 it was $1.359 billion, and in 2007, $1.434 billion -- not more than about five percent separated the low and high numbers. Policy count showed slightly less difference, with 101,438 in 2009; 100,934 in 2008; and 98,262 in 2007.

A closer look at the market data shows that while there were 3,000 fewer policies written in 2007 than in 2009, there was $49 million more in premium. Average policy premium in 2007 was $14,594 versus $13,652 in 2009, a drop of almost $1,000 in average policy premium.

Andy Packard, vice president and branch manager for Gresham & Associates insurance brokers in Orlando, writes both stand-alone commercial property and commercial package policies. "I'm still seeing prices drop across the board," reported Packard, "even on frame construction for companies that will still write them."

Changes Ahead?

What could force a change in the market? Typically, a robust investment environment would allow carriers to be aggressive in generating premium to make up some of the difference in investment, but that is not likely in the near future. Poor results normally cause carriers to either drop out completely or to curtail writings. While this has already happened to some extent, the difference in this market is that there seems to be more than enough capital coming into the market to replace what leaves.

Another factor is the impact of overall poor underwriting results, which will show up only after a catastrophic event. Carriers are quick to point out that it is not just the Florida property market that drives rates and underwriting acceptability on their property books. "The market is going to react more to any 'events,' not only in Florida but on the gulf coast and elsewhere," said Sanjay Godhwani, executive vice president of Lexington Insurance Co. in Boston, Mass.

It is unlikely that rates will change quickly or soon. So the next likely option to gain more premium and revenue is for carriers to increase coverage and/or become more aggressive by re-tooling their underwriting requirements. Whether carriers are willing to do that depends heavily on what is happening in the reinsurance market. "Reinsurers balance sheets are a little better today, and more capital may be in play," said Godhwani. "That probably won't result in huge changes in pricing, but it may make a carrier a little more willing to offer better terms."

Wholesalers have seen those markets reflect better terms in a variety of ways, including a slight drop in rates to keep a renewal, an extra push to write a new piece of business, or acceptance of an account for placement that may not have been written a year or two ago. "Standard markets are a bit more prevalent this year," said Packard, and in most sections of the state this is true. Despite the preference of agents and brokers for rate competition on all accounts, there is still a great deal of weight given to the account itself. "Much of that has to do with how aggressive a carrier wants to be on the individual risk as well as the (geographic) area," said Godwhani. "Carriers are more educated, more model driven, more globally driven as well."

The additional experience, education, and modeling acquired and processed by the insurance companies can result in much greater selectivity, and not just for individual risks. A carrier's position on where and how it applies the limits can be just as crucial to the success of a retail or wholesale producer as the rates. Lower rates impact more than just total premiums written, and as Packard said, "What we may start seeing is that it is not worth it for carriers to put up the property aggregate limits this year. It may not be worth it in comparison to what premium it generates."

Top Players, Pricing Consistent

The past few years have seen little change in most of the key statistical categories, as reported by the FSLSO. The top ten commercial property carriers remain fairly constant, with Underwriters at Lloyd's London and Lexington Insurance Co. leading the way each of the past three years. Comparing the two illustrates that writing a significant amount of business can be accomplished in different ways. Lexington represents a carrier writing larger premiums/values, while the Lloyd's premium totals include more binding authority business and are achieved with over 70 times the number of accounts reported in the same period for Lexington. One major change in the last year has QBE Specialty Insurance Co. breaking into the top ten in a big way, recording over $158 million in premium.

The total reported written taxable E&S premiums (agent data only) in Florida in 2005 and 2009 were virtually the same: $2.828 billion in 2005, $2.904 billion in 2009. It is interesting to note the comparison of the taxable premiums for commercial property in those two years. Commercial property premiums doubled during that period. Commercial property was a little more than 25 percent of the overall total in 2005, and in 2009 the coverage represented a little less than 50 percent. That indicates huge premium losses in many other classes of business, as well as the obvious increase in rates and premiums on the property side.

Rates seem fairly stable at this point, and a major reason for that is what is going on in the reinsurance market. "Reinsurers increased rates by 10 percent to 15 percent in 2009 and this year it will probably be flat," said Godhwani. Packard also noted that, "Reinsurance treaty renewal pricing is down, from what we hear."

More Markets Enter the Mix

Despite the ongoing stress of trying to write business in a continually challenging marketplace, there is no lack of competition. Some additional carriers have been added to the mix in the past few years, along with additional wholesale outlets. "There are probably more markets now than there were two or three years ago," said Packard.

As for Citizens Property Insurance Corp., at this point its impact on the total commercial property marketplace is minimal (unlike its looming presence in the homeowners' market). For Lexington, Citizens is not an issue. "We're not really playing in the same arena," said Godwhani. Packard agreed, noting that, "Citizens is not much of a competitor in the central Florida area, even on the coasts, at least not on the business we're seeing."

Others report that there is some intrusion into their book of business, but the amount and percentage of commercial business written by Citizens is still a very small part of the Florida total. However, as with everything else in this marketplace, that could change quickly.

Characterizing this market is not easy, considering all that has happened in the past couple of years. "It's a strange market," said Packard. "Everyone is sort of sitting around waiting to see what happens. Most of us last year were thinking that by the 3rd or 4th quarter things would have changed, and it never happened." Godwhani summed it up, "Volatility in the past six years has the property market going up twice and down twice in the past six years. What other coverage market can say that?"

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