With more than $600 billion in policyholders’ surplus, the insurance industry is very well capitalized in spite of a large loss from Hurricane Sandy last year.
But even so, insurers have been keeping the price of property-catastrophe insurance relatively flat as they resist competitive pressures and maintain underwriting discipline, according to NAPCO, a commercial property insurance wholesale broker specializing in catastrophe coverage.
NAPCO presented its findings in the fall issue of its biannual report, “State of the Market: NAPCO Property Catastrophe Insurance Insights.”
The NAPCO report said insurers have been lowering prices for select accounts — particularly those with good loss histories — but they have been reluctant to offer discounts across the board and have even been raising rates for accounts with poor loss experience.
“Some accounts may indeed warrant a rate reduction, but broad downward pressure on rates would be inconsistent with our experience,” the report said.
The report said the market for frame habitation risks, in particular, remains difficult, with prices largely going up as insurers reduce capacity and exit the market.
The price of commercial flood insurance also remains quite high, and that has discouraged potential buyers, the report said. Additionally, with hail claims up sharply in the last few years, insurers are also increasingly imposing higher deductibles or percentage deductibles for Midwest wind and hail coverage and reducing capacity.
Looking ahead, even with lower reinsurance prices, the price of property-catastrophe insurance is expected to remain flat — with insurers focusing on the specifics of each account, such as location, loss history and quality of risk, the report forecast.
Experienced brokers can help insurance buyers differentiate themselves by preparing thorough and detailed submissions that may produce better modeling results and better underwriting outcomes, the report advised.
The NAPCO report said insurers are maintaining a measure of underwriting discipline in spite of the market pressures for following key reasons:
• The influence of catastrophe models and realistic disaster scenarios: Catastrophe models have improved over the last decade and are much more widely used than they used to be. Improved catastrophe models and the latest realistic disaster scenarios have been giving insurers plenty of warning about how large their catastrophe losses could be.
• Increased accountability: Rating agencies are aware of the catastrophe model results and have put pressure on insurers to maintain adequate prices. Rating agencies, under intense scrutiny following the 2008 financial crisis, have been taking a much tougher line with insurers than in years past. In addition to the rating agencies, reinsurers and investors also have pressured insurers to price their business appropriately.
• Continued low interest rates: When interest rates are high, insurers can afford to ease up on underwriting discipline as they can make up for underwriting losses with gains in investment income. But with low interest rates on conservative investments, insurers need to maintain price discipline to make an underwriting profit.
• Potential changes in capital management: When the market becomes flooded with capital, insurers seek to put that capital to work, which leads to an increasingly competitive market environment. Rather than use that capital to underwrite new business, insurers may be increasingly inclined to return capital to investors. This could alleviate some of the market’s competitive pressures.
Source: NAPCO LLC
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