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Specialty Lines Market Preview of the Insurance Marketplace What's in store for 2006? By Larry G. France The answer is: Nobody knows for sure what the market will look like in 2006. We can all make educated guesses based on the facts as we know them now. The problem is that not all the facts or losses from Hurricanes Katrina and Rita are reported. Loss guesstimates as of this writing ranged from $40 billion to as high as $60 billion. Hold that thought—Wilma may add as much as another $6 billion to $9 billion. In 2005, we went through 21 named storms and then it was time to brush up on your Greek alphabet. Storms Alpha and Beta appeared. The economic impact reaches beyond property losses. Some homes may never be rebuilt. And if they are rebuilt, it may take a year or more. Some businesses could fail. The future loss of clients to agents and brokers could impact their books of business. And what about clients who never even return to affected areas and relocate to other states? So many classes of business are affected by the dislocations, including restaurants, hotels, trucking, tourism, public livery, personal and commercial auto, auto dealerships, marina operations, and retail of all kinds. One industry that may not have entered your thoughts is the self-storage industry. According to Mike Schofield, president of MiniCo, the self-storage industry’s annual revenue is larger than the movie industry—approximately $16 billion. According to “The 2005 Self-Storage Almanac,” there are some 39,000 self-storage facilities. The almanac lists Texas as the state with the most facilities for the last three years, and Houston was the number one metropolitan statistical area in both 2002 and 2003. This area was hit when Rita paid Texas a visit in late September 2005. Schofield says that flooding prevented adjusters from looking at many facilities for several weeks. Several of MiniCo’s insureds contacted them on their Web site to inquire as to the condition of their facility. What happens to the customer’s possessions that have not been claimed because those customers have been relocated to another state and can’t contact the self-storage operation? Schofield says that most operators will attempt to contact the customer after 90 days of not receiving rental payment. They will have to remove the contents unless the federal government mandates that they retain them longer. Most of the damaged articles will have to be removed and destroyed by waste management companies because of mold, petroleum and other contaminates. The self-storage operator can purchase business interruption up to 15 months; also MiniCo can provide coverage on customers’ contents. A significant number of homes and businesses did not carry flood insurance in the areas hit by the series of hurricanes in 2005, but not to worry. In Mississippi apparently you don’t need flood insurance, because all damage is from wind, not flood, according to a lawsuit filed by the state against several insurance companies. The National Flood Insurance Program (NFIP) is available to any resident or property owner in a community that participates in the program. Single-family residences can be covered up to $250,000 on the structure and $100,000 on contents. Commercial property limits are $500,000 on the building and $500,000 on the contents. There is a 30-day waiting period. For further information call (800) 427 4661. The Web site is www.fema.gov/nfip. Hurricane Katrina’s losses appear to be greater than 9/11. When we add in Rita, Wilma and possibly other storms, the industry will be hit hard. It is just a question of how hard and which reinsurers and carriers will suffer the most. Even prior to the last hurricanes hitting land, some markets were backing off writings for the remainder of the year or until further notice. If you were one of the “lucky” ones you could renew business. How will current losses impact property rates not only in the Gulf region but countrywide? Opinions put the Gulf property rate hikes in the range of 50% and upwards. The rest of the country could see 5% or lower increases. This does not include watercraft, personal and commercial auto, marine risks, and energy which suffered considerable losses. Loss amounts will be affected by the increased cost of building materials such as any wood and petroleum products because of the devastation to the timber and energy industries in the Gulf region. Mac Wesson, president and COO of U.S Risk Insurance Group, Inc., and incoming president of the National Association of Surplus Lines Offices (NAPSLO), says that Katrina and Rita had an almost immediate impact on the excess and surplus lines commercial lines markets, especially in coastal exposures. “In certain cases,” says Wesson, “property writing was suspended until further notice, an indication that losses were greater than first thought. We’re aware of one company that has acknowledged its CAT Loss Modeling System was way off the mark and basically failed to depict true exposures. Therefore, the storms produced much more severity than the model anticipated.” Wesson states that in the case of companies that continue to write property business “we have seen rates increasing by 50% and more in coastal regions, and certain carriers have mandated 25% across the board, meaning countrywide. Without question, rates are up and capacity is down. “By most estimates this will be at least a $40 billion event, which is going to take a heavy toll on the capital and surplus of the industry,” he continues. “For that reason I believe the storms will have an effect on nonproperty lines as well. As carriers look to replenish their surplus, they will look to other lines of business to be the catalyst. It will be an interesting dynamic because as carriers compete for profitable casualty business, for example, to replenish the surplus the storms depleted, the tendency will be for competitive pressure to push down. “However,” Wesson adds, “I believe decreases will be neutralized by the realization that rate stability is needed and that rate decreases would be making a bad situation worse. At the very least I would think that casualty pricing would flatten out and not continue the recent softening trend. This is all speculation, however. The bottom line is we’ll just have to wait and see what happens.” What about the program business segment of our industry? What will be the impact of January reinsurance treaties on program pricing? “There can be no doubt that the natural disasters our country experienced this year, including Hurricanes Dennis, Katrina, Ophelia, and Rita, make 2005 one of the deadliest, most expensive years in the last century,” according to David A. Jordan, senior vice president, Lexington Insurance Company. AIG Programs is a unit of Lexington. “With catastrophe losses now expected to exceed $50 billion for the insurance and reinsurance industries, it’s hard not to conclude that this will be a market-defining year with short- and long-term ramifications. For U.S. program business, these ramifications are likely to include issues of capacity, appetite, and rate, and will mirror the impact to the overall market.” (Editor’s note: Jordan’s remarks were made prior to Hurricane Wilma.) Jordan also noted, “The losses impact many commercial and personal lines of business, including commercial property, time element, residential property, commercial auto, personal auto, inland and ocean marine, environmental, and even casualty. Losses appear to be spread roughly equally between insurers and reinsurers. Many reinsurance treaties renew January 1, and it remains to be seen how capacity and pricing will be deployed. But the magnitude of the losses certainly suggests that the industry needs more rate and other terms and conditions to fund the risks associated with coastal and Cat-exposed business and personal lines.” The other major issue is the renewal of the Terrorism Risk Insurance Act (TRIA). The deadline is December 31, 2005. If TRIA is not renewed, and there is opposition or lack of support, you will see a major change is how business is written—if at all, in some cases—and pricing will skyrocket. The increases post 9/11 may seem minute in comparison. Along with the December issue of Rough Notes, subscribers receive the 43rd edition of The Insurance Marketplace, the directory of excess, surplus, specialty lines, and industry services. The Insurance Marketplace contains 670 categories of coverages, programs, and services. Four new categories are Motorcycle Custom Manufacturing and Fabricating; Owners and Contractors Protective Liability (monoline); Film/Movie Production, Short- or Long-Term; and Power Distribution-Electric Utilities. Upcoming articles on Specialty Lines Markets include: Contractors and Surety in January; Watercraft in February; and new in March, Cyberliability, including network security, e-commerce and other Internet-related risks. * |
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