Market Softens For Large-Properties

The softening commercial insurance market has spread into the large-property sector, according to wholesale brokers, forcing them to work harder to close deals, although independent agents expressed some relief at the easier time they now have securing adequate, affordable coverage for their clients.

There are two primary reasons for the current pricing climate, brokers point out–and one is related to the other.

First, the 2006 storm season was a quiet one, which the industry needed after record 2005 catastrophic losses (led by Hurricane Katrina) and the grand slam of four major hurricanes the year before.

Following 2005, the industry experienced a hard market for property-catastrophe risks that lasted through 2006 and into 2007.

However, the massive cat claims of 2004 and 2005 produced the second development–an influx of capital into the property-catastrophe market to take advantage of soaring prices. With 2006 and (at least up until presstime) 2007 being relatively quiet cat seasons, brokers say excess capacity is starting to dampen prices for a growing number of large-property owners.

This doesn't mean the market is softening for everyone, however, as some coastal areas are still considered riskier than other, more inland properties. But rates are, at worst, leveling off for most, brokers say.

“The rapid decline mirrored the rapid increase [in the property-catastrophe market's capitalization], with very few exceptions,” according to Ed Magliaro, executive vice president and national property practice leader for Atlanta-based Swett & Crawford.

Tom Cesare, executive vice president with American Wholesale Group's New York office, described a market that after 2005 saw premium on a property of $10 million in value rise from $100,000 to $600,000.

After the market realignment through 2006, and the passage of time without further storms hitting the U.S. mainland, the large-property market began to see reductions, noted Mr. Cesare. Restructuring of some accounts has led to premium cuts ranging from 10-to-15 percent–notably on jumbo risks.

“This is a good time for insureds,” said Richard Munce, regional vice president for Montvale, N.J.-based wholesaler JIMCOR out of their Marlton, N.J. office.

“The market is in a tailspin for major risks,” according to Mr. Magliaro–defining “major” as accounts with over $500 million in value–adding that reductions can extend to values as low as $25 million.

Contributing to this decline, Mr. Munce noted, is that independent agents have been educating clients about the markets, coupled with buyer awareness of the industry's record profitability of late and the general softening market conditions across the industry, with increased capital and competition driving rates down.

“[Agents] have educated the insureds to be up on the scoop on the industry,” he said. “They know what is happening.”

It also means buyers are not accepting the first bid that comes in and are insisting that brokers shop their account.

“[Buyers] are testing brokers now,” observed Mr. Munce. “They are taking brokers to task to test the waters.”

The market softening also must be placed into context, according to Mr. Magliaro, who noted that while catastrophe risks may be seeing declines in double-digit figures, that's only after prior increases of between 100- and 300 percent.

In response to those triple-digit hikes, large-property buyers realigned their appetites by taking the minimal amount of coverage they could get or accepting large deductibles on their polices.

While that buying strategy continued during the first six months of this year, he said, price reductions are allowing buyers to purchase more coverage “at a price that fits their pocketbook.”

By their nature, softening markets produce more competition, which translates not only into price cuts but expansion in coverage or a loosening of terms and conditions. What insurers are offering as they vie for volume varies, which means producers are constantly negotiating on risks, according to Mr. Munce.

“They are dressing it up for the client,” he said, noting that while one carrier might offer a reduction in deductibles to keep a policy in place, another may offer replacement costs over actual cash value, or pickup flood or earthquake coverage.

“We are working three times harder to write the same business,” said Mr. Munce. “There are so many variables that have to be entered in and changed, that we just have to be aware of what is going on all around and stay up on current events.”

He added that “there is some shopping going on. With clients of that size, when buyers have a board to report to, they have to go out and test the waters. They do not want take a shotgun approach, but they do expect creativity and selectivity.”

One strategy Mr. Cesare dismissed as a nonstarter for large-property insureds is splitting the account–especially if a portion of it involves catastrophe risks.

If an insurer likes a significant portion of an account but is shying away from the catastrophe risk, placing the account as a whole provides leverage.

However, he noted the broker needs to approach that kind of account with an experienced underwriter to avoid messing up the limits. “You have to go about this together gingerly, and put it together properly,” he said.

The most severe softening is occurring in the Midwest, according to Mr. Munce–in what he characterized as a depression. The Southeast remains “difficult,” and he called the West Coast a “unique” market because of concerns with earthquakes–but overall, “it's available, but depressed.”

The most difficult sections of the country to place large-property business remain east Texas, Louisiana, Mississippi, Alabama and the panhandle of Florida, he noted.

“The die has been cast, and we just have to take it a little bit at a time to see how it plays out, and watch for other factors that influence the business,” according to Mr. Magliaro.