Filed Under:Agent Broker, E&S/Specialty Business

Executive Viewpoint: E&S Property Market Still Strong, Highly Competitive

Extreme acts of nature have been felt globally over the last 12-18 months. 

• The February 2010 Chilean earthquake was ranked as the sixth largest ever to be recorded by a seismograph.

New Zealand’s South Island (Christchurch area) suffered significant quakes in September 2010 and again in February 2011.

Japan’s March 2011 magnitude 9 Tohoku earthquake and tsunami combined is the most powerful geological event in that nation’s modern history.

Each of these catastrophic events resulted in significant fatalities, property damage and other interruptions to normal commercial and personal affairs.

In addition to these reminders of nature’s destructive powers globally, this year in the United States we have witnessed savage tornado activity across the lower central and southeast states. These events are responsible for more than 500 deaths; historic flooding on the Mississippi and other U.S. river systems; increased levels of convective storm (tornado and flood) damage. In addition, wildfires rage in the southwest, with one described as the second worst in Arizona history. Another fire, threatening New Mexico’s Los Alamos National Laboratory in June, prompted evacuations there.

These events are making this period one of the more memorable natural-disaster times, even though no hurricanes have made U.S. landfall.

Domestic E&S Market Impact

Certainly, these events, like those before them, represent substantial aggregate exposures to the global insurance industry. As reported earlier this year, estimates of insured losses for the Japan earthquake ranged from $15 billion to as high as $35 billion. These estimates exclude any losses related to the crippled nuclear reactors.

By comparison, according to the Insurance Information Institute, the current record insurance payout for an earthquake is for the 1994 Northridge earthquake in California, at $22.5 billion in insured losses in 2010 dollars. Hurricane Katrina led to total insurance payouts of $41.1 billion.

For the recent disasters in the United States, some insurance companies have been tracking and reserving claims as quickly as they are made. This is a time when we, as an industry, can serve our collective customers well in their time of need.

We currently estimate that we have received 80-90 percent of the claims we will receive overall from the second-quarter storms. While the domestic E&S industry has reported greater than average storm losses for the first half of the year, there is no reason to sound any alarms for the excess-and-surplus lines marketplace. Differences in the type and concentration of business typically written in the E&S market have meant that extreme U.S. storm events in the first half of 2011 impacted admitted markets more than E&S markets.

Moreover, the key to controlling losses is to be judicious in extending aggregates and in writing for specific kinds of risks, i.e. wind damages. The relative position of different underwriters will also be impacted by how aggressive or prudent their risk-management modeling has been—for example, working with a 250- to 300-year return plan benchmark, versus selecting a 100-year return for planning reinsurance purchase and aggregate management.

Indirect impact: The reinsurance market

Thus, any impact of disaster-related losses on domestic property and casualty insurance availability and pricing in E&S markets is largely due to pressures on the global reinsurance marketplace. Well-run domestic carriers that manage their books prudently should be well situated when negotiating new catastrophe-reinsurance coverage on the pricing. Capacity, however, may become an issue.

A recent study by Morgan Stanley, reported June 2011 on propertycasualty360.com, noted that, while down from July 2010, the property and casualty insurance industry still has a strong excess capital position. Morgan Stanley did note that property pricing had inflected upward subsequent to the Japan earthquake, a trend it sees in place through the first quarter of 2012. 

Taking the other side of the pricing-capacity tandem, another study, by New York-based reinsurance intermediary Holborn, suggests that the earthquakes referenced earlier and other global events, along with the U.S. tornadoes, will serve to tighten capacity more than pricing for the U.S. property-cat reinsurance market.

The industry maintains financial strength to execute on our commitments.

While the global insurance industry has recently sustained significant losses, any projections of future market events for the E&S industry must be viewed in the context of what has been, and still is, an extremely competitive market. The industry remains overcapitalized at a time of generally weakened demand. The E&S carriers are equally as strong as our admitted colleagues.

Further, recent history suggests that catastrophe events tend to draw new capital into the marketplace. We must carefully watch the potential for the next hurricane season to change the dynamics previously discussed, as we experienced in 2005 when four hurricanes hit Florida in a single year.

Well-capitalized underwriters, following prudent catastrophe modeling with a robust enterprise-risk-management control environment, should continue to serve insureds well.

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