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The Storm’s Aftermath: Property Insurance

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The property market finds a new normal in the wake of a tumultuous few years

The insurance world tends to look backward before it looks forward, and property insurance is no exception.

Last year, 2013, turned out to be the most profitable year for property insurers since the financial crisis in 2008. With most markets still reasonably hard and on the heels of the lowest-wind season in more than 30 years, the industry fared extremely well, according to Marla Donovan of the Office of the Chairman at Burns & Wilcox in Farmington Hills, Mich.

As it turned out, the most serious storm of 2013 was a Category EF5 tornado that destroyed the Oklahoma City suburb of Moore, damaging almost 10,000 houses and racking up $3.1 billion in property losses, of which $1.8 billion was insured.

Coastal rates have dropped only slightly, despite Hurricane Sandy’s $35 billion in insured losses and the burgeoning property values now hugging the coasts. But markets are softening and capacity is increasing. Without a major storm in 2014, rates could tumble, Donovan says.

Still, she expects any drop to be relatively modest, because responsible carriers are mindful not only of their underwriting, but also of the looming possibility of $10 billion or $12 billion events as well as their responsibility to accumulate enough reserves to pay obligations. What’s more, the RMS 11 catastrophe models and internal carrier models anticipated grueling losses that help to support rates to some degree. A new, freshly configured RMS model is expected this spring, but that, too, will take time to digest, so it’s unlikely to make an immediate impact on rates.

“New agencies are forming all the time, and while they can gain access for their Main Street business, they can’t or won’t get all the market access they need.”

Amid the market softening, standard carriers that had relaxed their standards and migrated to traditional excess & surplus business are pulling away from difficult, complicated risks in favor of business they know better. In North Carolina’s non-coastal areas, for example, “we’re seeing more of the traditional E&S business like high-loss, high-theft and unprotected property again,” observes Kasey Vaughn, vice president and managing director of the Burns & Wilcox North Carolina offices.

Despite market cycles, a significant portion of the wholesale broker business in this space continues to involve the admitted market, where they “pivot between suppliers of capacity and the thousands of brokers and agents who need markets or additional expertise,” says Donovan. “New agencies are forming all the time, and while they can gain access for their Main Street business, they can’t or won’t get all the market access they need. And carriers have been pulling back on their local offices, so it is more difficult for them to develop necessary relationships.

“We give these brokers and agents a terrific distribution platform, with local access in more than 40 states,” she continues. “That way, they can place their business with a minimum expense to them and to the carrier. And since Burns & Wilcox operates solely as an intermediary, we never compete with our retail brokers or agents.”

Coastal View

In Louisiana, where 80 percent of property is located in Greater New Orleans, Hurricane Katrina’s effects are still being felt nine years later, says Blaise D’Antoni, corporate vice president of Burns & Wilcox and managing director of the company’s Louisiana offices. Standard markets fled the state as soon as state regulators would let them. Then in stepped brokers like Burns & Wilcox to help them move their business to the excess & surplus market.

“We could do this because we had strong relationships with large, privately owned agencies and had equally strong relationships with the London market and large and niche domestic E&S carriers,” explains D’Antoni. And while the property market is always in transition, this business has remained with the brokers and agents in the E&S market through hard work.

“When you are writing business that is a more preferred book as this is, making a lot of money for companies and writing it at rates higher than the rest of the country, you become a target, especially when you go a couple of years without a storm,” D’Antoni says. By maintaining strong market relationships, though, you can change course on a dime and tweak coverage, form and sometimes price to meet competition.

Last April, the London renewals market experienced a severe capacity issue for the greater New Orleans area, similar to the situation domestic E&S carriers were facing. With the market so firm, rates rose and more restrictive policies put in place.

Burns & Wilcox responded by raising the minimum values it would write in Louisiana and by limiting its placements to better risks that deliver better loss ratios. Those moves strengthened the quality of the book, which in turn strengthened the bond Burns & Wilcox has with the Lloyd’s syndicates across the Atlantic. As a result, come 2014, some of those syndicates canceled contracts with other brokers and turned to Burns & Wilcox in aggregate to place more business, says D’Antoni.

Meanwhile, the property market is easing a little this year. Louisiana recently paid $100,000 to each of eight or nine take-out companies to help depopulate its state-backed Citizens Property Insurance Corp. in order to make it truly a market of last resort. Those take-out carriers are disrupting the market in several ways, however, observers say. For one thing, these companies don’t always know or understand the nuances of the New Orleans property market, meaning their pricing may be out of line with the risks they assume.

D’Antoni says he’s concerned these companies may not be well-capitalized, as most have a surplus of only $25 million to $30 million, and tend to be rated by Demotech rather than A.M. Best, which has a more rigorous vetting process. They also have been known to undercut the market.

Though these take-out companies do have “admitted” status, that alone is not enough to guarantee they will have the wherewithal to survive. According to the Miami Herald, six of 18 companies that were approved for take-outs from Florida’s state-backed Citizens Property Insurance Corp. between 2007 and 2011 ultimately failed. And that’s without a major hurricane in Florida.

Vaughn has noticed a similar situation in North Carolina and South Carolina, where about five non-A.M. Best-rated companies have entered the market from Florida and offered property rates as low as 50 percent less than other providers. At least one of them is teetering.

When an admitted company fails, its accounts are backed to some extent by the state guarantee fund, but there are restrictions on types of insurance and payments are capped at a certain level. In Louisiana, North Carolina and South Carolina, the fund will pay no more than $300,000 per occurrence for property. In New Orleans, where the average value Burns & Wilcox writes for Homeowners Coverage A is $500,000 to $750,000, a severe loss could easily exceed the guarantee fund’s limit, regardless of the amount of coverage purchased.

Even when an insured’s loss is within the guarantee fund’s limits, the state must first take over the failed carrier and the claims filed with the fund, as well as the coverage and loss proven. ”It’s a long process that takes months or sometimes years,” said Donovan.

It’s the kind of dynamic in which retail agents may struggle to explain the justification for a rational rate to a high-value client who sees a chance to save money with one of these companies. But as difficult as that conversation can be, it’s much harder for a broker or agent to break the news to a high-value client that their insurance carrier failed and most of their loss will not be paid, notes Vaughn.

Condo Coverage Nuances

Condominiums are an increasingly popular housing choice for many Americans; the National Association of Realtors reported a 23 percent year-over-year growth for July in condominium and co-op purchases. As a result, the market for condo insurance could potentially reach $50 million in the next five to eight years, according to Vaughn.

The condo market in New Orleans is unique, with 17th century French Quarter buildings and 150-year old Warehouse District structures becoming three or four-unit high-end condos, while homes in the Garden District that had previously been converted to apartments are morphing into five or six unit-condos, says D’Antoni. Because his office is staffed by professionals who know the retail brokers and agents, and the area, well, they have the resources to show underwriters that these old buildings have indeed withstood hurricanes and fires and are exceptional risks to write.

In areas where condos are more generic, their relatively low premiums create a resource challenge for brokers and agents. Condo-ownership contracts vary by state and by board, and retailers must read each one carefully to determine the proper insured value of the property.

“It is complicated to figure out who owns what,” says Vaughn. “One contract might give the condo association ownership and responsibility for everything but the contents and crown molding, so that is the only property the policy should cover. Another condo’s bylaws might hold the owner responsible for the interior of the unit, including fixtures and appliances, so a lot more coverage is required.”

To help brokers and agents handle condo coverage easily and efficiently, Burns & Wilcox has developed a new nationwide condominium program through Lloyd’s, she says. The program can accommodate anything from a $25,000 condo in inland South Carolina to a high-value condo with content limits of $1.5 million or more in coastal California. That takes out the guesswork, much of the homework and one source of headaches for the retail broker or agent writing the business.

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