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Market Update
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U.S. - Property
Printable Version
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The global marketplace for large property has held a generally steady course over the
last six months—with the exception of the energy sector—in spite of our concerns
regarding prospects for capacity and pricing. The market is now in what might be
described as “the calm before the potential storm.”
But at the start of the year the market was facing uncharted waters. In March, we
warned that a combination of big catastrophe and energy losses in 2008, rising
reinsurance costs, and capital market instability could lead property insurers to hoard
capital, cut back capacity, and raise prices on large property programs, particularly
those with CAT exposures.
In 2008, insured losses in the U.S. totaled $27 billion, the highest since 2005, the year
of Hurricane Katrina. On top of that, a stunning meltdown of world markets that
year drove down the value of investment portfolios, negatively affecting surplus.
Even so, premium increases were not as bad as we first feared. Premiums were up
for large property clients with catastrophe exposure for both wind and earthquake
and for clients with excessive losses. Clients that were not exposed to catastrophes
and had minimal losses generally saw only flat to moderate increases in their
premiums.
The exception was in the energy sector, which included, but was not limited to,
companies in the oil and gas, petrochemical, mining, and utility industries. These
companies were hit with significant premium increases at their renewal as a result of losses totaling about $5 billion in 2008—none of which were catastrophe-related. The premium increases were sharp because
the insurers that provided the market for this sector saw a significant increase in their reinsurance costs, resulting in a sharp drop in
capacity.
In the coming months, the trend in premiums will be very much influenced by any losses arising from the 2009 hurricane season
and any other catastrophes. While hurricane losses have been minimal so far this year, September and October are often the most
active months, and an industry-changing loss could happen at any time.
Any sizable loss, whether from a hurricane, an earthquake, or any other catastrophic event, could lead to a dramatic shift in the
market, prompting insurers to pull back from the market to protect capital and write new business only at sharply higher prices—
especially for those clients with catastrophe exposures. As it is, insurers have been trimming their participation in some programs,
which has forced clients to reach out to new insurers to complete their programs.
A big loss in the second half of 2009 also could reawaken insurers’ concerns about their ability to “reload” or replenish surplus
through offerings in the capital markets. Although the capital markets are more stable now than they were in 2008, concern remains
about the economic outlook and the potential for a double-dip recession. A catastrophic loss at a time when capital markets are
shaky and volatile would force insurers to put a much higher value on their surplus and make them less willing to gamble with it.
Although the insurance markets may be calm now, it can all change in an instant. Lockton recommends that clients be prepared to
present the insurance market with detailed, up-to-date empirical construction and engineering data to support their renewal efforts.
In today’s market, where insurers are nervous about the potential for a sudden catastrophic loss, policy data will be key to
differentiating accounts, setting apart the good risks from the poor ones, and will play an important role in maximizing premium
reductions.
Lockton also recommends clients work with as many markets as possible to reduce their dependence on any one market. Capacity
may be adequate at the moment, but any shift in market conditions could force insurers to reduce capacity or exit markets, leaving
clients with few choices at a difficult time. By establishing strong relationships with insurers during untroubled times, clients
improve their chances of maintaining those relationships during a crisis.
The global property insurance markets have emerged from the last six months in generally stable condition. But the heavy
catastrophe losses and economic turmoil of 2008 have not been forgotten. With the 2009 hurricane season still unfinished and the
potential for other catastrophes possible at any time, clients need to position themselves now, while they can, to be ready for when
the market shifts.
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Please contact your Lockton Representative for further information regarding any information contained in this
market update.
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James Rubel
Executive Vice President
Director of Property
Global Property Practice
New York, NY
Tel: 917.351.2570
E-mail: jrubel@lockton.com |
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