Terrorist Attacks PushProperty Rate Hikes Higher

A dramatic upturn in commercial property rates by fall of 2000 has continued into 2001, and the aftermath of the Sept. 11 terrorist attacks will most likely drive rates up even further, according to industry observers.

How far up will they go? “There are some limits to that,” said Clint Harris, vice president, insurance research and publications for Hartford-based Conning and Company. “Could it be 20 percent? It could. Could it be 100 percent? On rare occasions.”

Most likely, however, rates wont be doubled by primary insurers, he said. “You cant just double it for most accounts. You can increase it maybe 20 percent, but thats still quite an escalation,” he explained.

In general, property rates have been going up significantly in the United States “for some time,” Mr. Harris noted. The trend began in late 1999, he said, “when a few insurance companies were refocusing on the fact that they had lost so much money,” particularly in the middle market “between small and jumbo-sized accounts.”

Connings semi-annual survey of insurance agents and brokers found on average a decrease in premiums of about 4 percent in the spring of 1999, he said. By fall, however, the number had moved to “somewhere between a half-point and breaking even.”

By spring of 2000 the number turned positive, “around 3 percent.” But by fall of 2000 “that number turned to 9 percent,” he explained.

As a result, some companies began to refocus on turning around a decade-long soft market, he said.

Storms Lothar and Martin in 1999 caused reinsurance companies, particularly those exposed to catastrophes, to “tighten up” property rates, he said. As a result, throughout 2000 there was a general trend toward increasing property premiums, Mr. Harris explained. Rates rose both in reinsurance and primary insurance areas throughout 2000, he said.

The terrorist attacks of Sept. 11 affected many types of coverages, which “have to be added and they turn out to be some significant numbers,” he said. “What that means going forward is that we knew all along that you really couldnt count on a continuation of low catastrophes, so you have to input that, and heres more evidence.”

This catastrophe is different, however, because it was something previously unforeseen, he said.

“Going forward there will be no one who doesnt think of terrorism,” he said. “My suspicion is that theyre going back over policies now and asking, What is the net retention we have this based on?”

Most likely, he said, we will see an acceleration of premium rate hikes, which will show up “in a quarter-and-a-half,” he said. “My suspicion is that anybody who is out there pricing vertical exposures has already made adjustments. Anything thats on their desk to be quoted at this point is going to see a higher price.”

Alfred Tobin, managing director of Aon Risk Services in New York, said that “rates are going up considerably.” However, he added, “the good thing is thats it's still case by case. The biggest violators, as usual, will pay more and the better risks hopefully will pay less, but theyre clearly going up at an unparalleled amount.”

The key coverage that everyone is concerned about “obviously is terrorism,” he said. “Hopefully between the insurance community and the federal government, well come up with some type of solution for our customers going forward.”

Even though property insurance rates are expected to increase as a result of the terrorist attacks, “its actually a continuance of whats been seen all year long,” he said.

The three catastrophe elements–flood, wind and earthquake–are getting more attention than ever, he said. Now, “were seeing much more appreciation paid towards flood because of [Tropical Storm] Allison” earlier this year.

Key policy term differences, Mr. Tobin said, include more focus on catastrophe elements, an increase in retentions and possible coverage restrictions. He added that general limits are now being looked at on a case-by-case basis, while “blanket limits are hard to come by.”

Underwriters now focus on what they think their maximum loss potential might be at an individual location, he said. For example, he said, “last year where they were comfortable giving out $100 million for that location, today, even though they still have treaties in place, they may be comfortable only giving out $25 million.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 22, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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