On June 1, we entered the 2014 North Atlantic hurricane season. The National Oceanic and Atmospheric Administration (NOAA) is predicting a mild to normal hurricane season. Colorado State University forecasters have also predicted below-average activity, though they have since altered this prediction to include one more potential storm and downplay the role of El Niño. Still, their conclusion remains the same—it will likely be a quiet season.
But no amount of forecaster flip-flopping can change the past. These predictions follow a mild 2013 season when no hurricanes reached the U.S. mainland, one of many complex factors driving down overall property-catastrophe insurance pricing in 2014. If the mild predictions are correct, insurers may be looking at another year of low wind-related property catastrophe losses.
Although we have to wait and see how the hurricane season plays out, agents and brokers can still position themselves now to take advantage of lower pricing and write more business in this market. To do so, they need the right understanding of property-catastrophe market conditions and strategies to navigate these conditions for their clients.
Here are four answers to basic questions on how agents can take advantage of the current market.
Why a soft market and how has it affected pricing?
Several factors contributed to this softer property-catastrophe market. As we entered 2014, the market had ample capital, enjoyed strong growth in premiums and experienced low catastrophe losses in 2013. U.S. hurricanes were not the only storms or natural disasters to go easy on 2013; global catastrophe losses in 2013 totaled $31 billion, well below the 10-year average of $56 billion. This allowed insurers to report higher profits than the previous year.
Coupled with an infusion of capital from non-traditional sources, those higher profits have encouraged insurers to begin lowering their rates. In 2012, they had raised rates in response to the then-new version of the RMS hurricane model and its broadly higher expected losses. However, pricing in 2013 was stable. Without a major catastrophic event to shake up the marketplace, insurers are now pricing more competitively.
How can agents and brokers capitalize on lower pricing?
These market conditions provide an opportunity to secure better pricing for catastrophe-exposed property accounts. Insurers have reduced rates for most accounts by about 5% to 25%, though an account may enjoy greater reductions based on loss history, pricing history, location, carrier appetite and catastrophe modeling results.
To secure even greater price reductions, agents and brokers should consider program restructuring. This can be a good idea in any market. However, a soft market allows insurers to expand their risk appetite and capacity, which may lead to fewer program layers and better pricing for these often complex accounts.
In this pricing environment, agents and brokers can drive carrier competition to seek lower rates, especially larger accounts that have significant premium mass. It's important for agents and brokers to discuss such negotiations with their clients, since they must also consider overall and historical carrier relationships.
How can catastrophe modeling help secure better pricing?
Much is made of the importance of accurate data in risk modeling, and for good reason. With every update, catastrophe risk modeling products are expected to get better at accurately predicting loss events by incorporating more types of data and modeling different types of events. For example, after the storm surge that accompanied Sandy, insurers became more concerned about modeling for flood losses. In short, underwriters are depending more and more on modeling to gauge and price risks with catastrophic property exposures.
These models can be your friend or your foe, depending on the data you provide. As a broker, your marketing team must communicate with your customers about the importance of risk models and the data that makes them work. Not only do underwriters expect complete construction, occupancy, protection and exposure (COPE) data, but also accurate asset (buildings/contents) replacement values and related business income values. Underwriters know that the more data provided, the more accurate the model's results will be—and the stronger the broker's bargaining position will be.
Accuracy and comprehensiveness are key. Cat models rely on an expansive building construction database. The omission of data on an insured's statement of values causes the model to create a damage function for a specific location based on the average qualities of similar buildings in the geographical area noted in that database. Providing quality data typically puts your customers in a better bargaining position by allowing underwriters to accurately assess the risk.
Will a major hurricane shift the market?
The market could again begin to harden in response to a very large catastrophe loss. With hurricane season ahead of us, we have to wait and see. Still, the market entered 2014 so well capitalized that it may take multiple catastrophe losses to shift the market cycle. Short of such losses, we can expect property-catastrophe market conditions to remain soft for some time, which means insurers will need to continue to price competitively for desirable business.
As the property-catastrophe market moves through a softer phase of the cycle–and new innovations bring additional change to the marketplace—agents and brokers are in a position to retain and gain accounts. Through both securing better pricing and establishing trust through expertise, brokers and agents that build practical expertise and in-depth market knowledge into their marketing teams can allow them to weather market changes, no matter what hurricane season wreaks.
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