Commercial insurance brokers from across the country say so far, the impact of Hurricanes Katrina and Rita has been minimal, but they are bracing for higher prices, reduced capacity, increases in deductibles and tighter terms and conditions for property/casualty coverage as a result of the devastating Gulf Coast storms, an industry survey reports.
The third quarter 2005 Commercial Property/Casualty Market Index of The Council of Insurance Agents & Brokers showed some isolated premium increases and coverage changes. But the survey period – July, August and September – covered only a few weeks of the Katrina-Rita aftermath, and brokers said the worst is yet to come.
“Habitational pricing and deductibles are up, even outside coastal regions,” said one broker from the Southeast. “Carriers are stating capacity in (the most exposed) coastal areas may be limited going forward. Umbrella underwriters have mentioned difficulty with reinsurers – claiming they will be passing along Katrina/Rita costs to insurers.”
“A firming of the property market is emerging,” said a broker from the Northeast. “Capacity on high-limit accounts is being reduced, and catastrophic exposures (i.e., flood, earthquake) have gone up a minimum of 50 to 200 percent depending on the severity exposed.”
Other brokers reported higher wind and flood deductibles and tighter business interruption underwriting since Hurricane Katrina.
Most commercial brokers responding to the survey said they expected the biggest impact of the hurricanes to be felt in renewals on Nov. 1 and Dec. 1, 2005, and in the always heavy Jan. 1, 2006, renewal period.
“Just beginning to see some hardening in the last few weeks,” a Midwestern broker reported. “Our 10/1 business wasn’t impacted, but indications are that future expirations, and especially 1/1 business, will feel the impact.”
“Some price increases, as well as a few carriers pulling out of the market until they figure out the reinsurance situation and the amount of losses they will have to pay due to these storms,” added a Southeastern broker.
Third-quarter rates, premiums decline
For most of the quarter, however, the commercial casualty market continued to experience declining rates across all sizes of accounts, although the reductions for medium and large accounts were not as great as in the first and second quarters of 2005.
An analysis of survey data by Lehman Brothers showed that the average commercial account experienced an 8.2 percent decline in renewal rates during the third quarter.
The Lehman analysis showed that the renewal premium for the average small account declined by 5.6 percent in the third quarter, the same rate as experienced in the second quarter. Premiums for medium accounts declined by 9.4 percent, and large accounts declined 9.7 percent during the third quarter.
Premium declines were reflected across most lines of commercial business during the quarter, although about one-third of the accounts for broker errors and omissions policies, construction risks, medical malpractice, directors and officers insurance and workers’ compensation remained flat or increased slightly during the period.
The future of flood coverage
In response to an open-ended question about what should be done to deal with flood losses in the future, a number of brokers said mortgage lenders need to be more assertive about requiring flood coverage – and insisting that the policies stay in effect – for properties in flood zones. One broker suggested that the National Flood Insurance Program should automatically issue an invoice, and another urged a three-year policy with automatic renewal.
Others suggested stricter set-back requirements and that the wind-versus-flood damage issue be addressed, perhaps with a special “hurricane” insurance plan. And several urged that the current flood zone maps be revised to better reflect the reality of exposure.
Several comments also noted that the federal flood program encourages people to build in harm’s way, and thus is “an unnecessary tax on Americans,” as one broker in the Midwest put it.
“Flood coverage should be provided by the commercial markets and carry realistic (high) pricing so that losses could be paid and development discouraged,” the Midwestern broker continued.
“Rebuilding in those areas that are prone to recurrent flooding should be looked at,” said a broker from the Northeast. “Why should anyone have to pay over and over to rebuild in those areas? If a carrier wants to accept that risk on a voluntary basis and buyers want to pay the premiums for the coverage, fine. But to make it mandatory or to force coverage through some federal backstop is a waste of taxpayer money.”
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