The Commercial Market

As Florida storm seasons go, the state and its residents have been fortunate to dodge any hurricane bullets for the past two years. This lack of storm activity has given the state's commercial property market some much-needed time to catch its breath and regroup. During this time rates were increased, and while property rates may have seemed excessive to some, at stake was the collective financial health of the state's market to survive a catastrophic event. These rate levels attracted new capital, allowed depleted capital and surplus lines accounts to rebuild, and permitted the private commercial market mechanisms to function as intended.

As a result of these trends, the commercial property market in Florida has softened considerably during the past 12 months. The market's capacity has increased as more carriers entered the market seeking an adequate rate of return for the value of their surpluses. The laws of supply and demand kicked in and pricing eventually declined.

While the standard market has returned in a more measured manner, the surplus lines market is becoming more competitive, with underwriting standards showing increased flexibility. This is particularly true for middle management and large property schedules. Accounts in this category are experiencing price reductions ranging from 20 to 25 percent in many cases, subject to individual risk underwriting. The commercial buyer is receiving slighter rate reductions, typically five to10 percent.

Taking steps to improve older properties and enhancing their abilities to withstand storm damage continues to be critical when trying to maximize premium savings. This holds true for any property regardless of where it is located. Underwriters are looking for building improvements completed within the last 10 to 15 years, particularly when it comes to roofs. They are also looking closely at the correlation of insurance to property values. Buildings constructed between 1995 and 2004 are clearly favored by carriers, and this is reflected in the rates. Other parts of the state — such as the Panhandle, Hillsborough, Pinellas, Miami Dade, Broward, and Palm Beach counties — remain tighter. There is some capacity in those areas, but not at the premium levels in the other parts of the state.

Of course, no commentary on the commercial market would be complete without noting the competitive nature of the so-called “commercial residential” markets for condominiums, homeowners' associations, and apartments. Citizens Property Insurance Corporation has aggressively sought these types of accounts by offering competitive rates and deductible levels, but at lower coverage levels. A lack of storm activity for the past two years has enticed the private market into underwriting these classes of business. Both admitted and surplus lines carriers are now at least willing to take a hard look at these accounts and are trying to compete with Citizens' pricing levels. Compared to Citizens, the private market clearly offers broader coverage.

So what is the commercial property outlook for 2008? Capacity will continue to expand and grow. New capacity will continue to enter the Florida market, be it from Bermuda, London, or other domestic markets, both admitted and surplus lines. Overall, property rates still remain attractive when combined with the proper underwriting approaches. This will be further helped by an inverse investment curve, where short-term rates are yielding returns that are equal to or higher than long-term investments. Given the abundance of capital and surplus in the US market — more than $500 billion in 2006 — the risk-to-return ratio in underwriting makes the catastrophe market somewhat more attractive.

Implementing a proposed Florida rule that would drop the mandatory requirement that foreign reinsurers no longer would have to have 100 percent in collateral when conducting business in Florida with Florida carriers would likely result in more capacity. Insurance Commissioner Kevin McCarty said that with the proper financial safeguards in place, this would promote additional competition and capacity.

From our vantage point, rates will continue to drift downward during the first quarter of this year and then stabilize and level off as the 2008 storm season approaches. In an effort to maintain slightly higher rates, insurers will trade deductible levels and coverage enhancements. Property owners will continue to see the lowering of wind and hail deductibles from the typical five percent to three percent or less. This will depend on the property's location within the state, combined with the building's age rather than carriers relying solely on construction. The latter is related directly to the much improved building codes and wind mitigation techniques that have been implemented throughout the state.

The use of “named storm” wind and hail deductibles will continue to be prevalent with minimum per-occurrence wind deductibles moving lower. A number of underwriters are now willing to consider the use of calendar year deductibles. Other areas that recent history has taught us to consider are the purchase of primary and excess flood coverage along with coverage enhancements such as ordinances and off-premises power failure coverage.

Since the peril of flood — including wind-driven water and storm surge damage — is excluded from most commercial property forms, there is a great need to buy flood coverage in Florida with its high-risk of hurricane damage. Purchasing flood coverage from either the National Flood Insurance Program or private market, to stand along side with the wind peril, will assist in reducing the likelihood of a claim dispute when damage has been incurred from both perils.

Ordinance or law coverage is another enhancement that is a desirable feature regardless of the age of the structure, but is especially important for older properties and for those properties located in areas that have recently undergone changes in zoning. Many underwriters will include this enhancement at no change. Surplus lines carriers will usually offer a blanket limit for all three overages combined.

Coverage for off-premises power failure or other utility services can be crucial to any number of clients. The extension of coverage can be included, usually with a sub-limit for little, if no additional, premium.

Overall, Florida's commercial property market has rebounded very nicely from the devastating storms that made landfall in the state during the 2004 and 2005 hurricane seasons. Not only has capacity returned, it has increased. Rate levels continue to be reduced, yet they reflect the new underwriting and modeling techniques that have been introduced during the past 24 months. The private sector continues to respond as we expected it would.