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TRIA expiration adds uncertainty to commercial property insurance market

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Until late last month, the commercial property market was a buyers' market unlike any that had recently been seen during the year-end renewals.

A combination of abundant capacity, cheap reinsurance and a relatively benign catastrophe environment continued to drive rates down. On average, rates were down by the mid-single digits and showing no sign of increasing anytime soon.

But that was before the Senate failed to extend the federal government's terrorism insurance backstop program before its Dec. 31 sunset. That raised questions about whether insurers would continue to offer the coverage, questions that are still being sorted out.

“The biggest issue is what the insurers will do,” said Duncan Ellis, national property practice leader at Marsh L.L.C. in New York. He said some insurers “were looking at the program as (being) nice to have but were underwriting their book while making decisions” irrespective of the existence of the program. Others wrote terrorism with the understanding that the program would be in effect and thus had the “ultimate backstop,” he said.

“So the question is what will those carriers do going forward?” said Mr. Ellis, adding that insurers that wrote terrorism coverage while relying on the fact the backstop was in place “may decide to no longer do so.”

“The underwriters are still making decisions as to their individual positions, and I will tell you that there is no uniformity of thought or action as of right now,” said Alexandra Glickman, area vice chairman of Arthur J. Gallagher Risk Management Services Inc. in Glendale, California.

“The process right now is to identify any policies that may have a sunset trigger so that appropriate capacity can be matched to the exposure,” she said. “Fortunately, there is terrorism capacity, but it isn't endless.”

Otherwise, the market is “very competitive,” said Randy Schreitmueller, vice president and manager of broker relations at Johnston, Rhode Island-based FM Global. “There's plenty of capacity. Mother Nature has been fairly kind and on her best behavior, and balance sheets are strong. It's probably going to be another good year for insurance buyers.”

“I found it to be a favorable market,” said Al Gorski, chief risk officer for the Orange County Transportation Authority in Orange, California. He noted that the authority's property program covers buses that are insured as property when they're parked in the bus spaces. “That's a little trickier for some of the carriers to deal with,” he said. Still, he called the market competitive, noting that the authority received a rate decrease of 5% including the buses when it renewed its program on Dec. 1. “We were able to change some deductibles and some sublimits as well,” he said.

The year's relatively low catastrophe losses are also helping temper the market.

“The quiet storm season appears to have a positive impact on the property market,” Carolyn Snow, director of risk management of Humana Inc. in Louisville, Kentucky, in an email.

“We were offered a two-year rate guarantee, subject to loss ratio, with significant rate reduction and coverage improvements. More importantly, we got concessions on wind zones in the upper East Coast area, which will help us achieve a bigger premium reduction in the DIC market,” said Ms. Snow who was also the 2014 president of the Risk & Insurance Management Society Inc..

Rates are “definitely down,” said Rick Miller, national property practice leader for Aon Risk Solutions in Boston. He said Aon tracks its data by quarters, and rates for the third quarter of 2014 were down 7.4% on average.

“That's pretty consistent with what we saw” in the second quarter, he said. “A year ago, we were still seeing rates going down.”

“We still see a negative rate environment for the foreseeable future probably flat to down 10% in 2015,” Mr. Miller said.

“It's still very much of a buyers' market like 2013 was,” said Marsh's Mr. Ellis, “Rates are on the average down this year again over 2013; it's high single digits, 9% to 10% on the average.”

“Barring any major issue or major catastrophe, we're going to see continuation of favorable terms and conditions,” he said.

“I think we're' definitely continuing to see the downward trend that began in 2013,” said Patrick Daley, head of property at Zurich North America in Schaumburg, Illinois.

He said that a couple of factors are affecting those decreases.

“We continue to see commercial insurers announcing good results, with combined ratios in the 90s, partially supported by a relatively benign catastrophe year,” Mr. Daley said. “There's a record amount of surplus in the marketplace, as well, and the soft reinsurance market, which is continuing to support more significant rate decreases,” he said.

“It seems everybody keeps adding more capacity to this market, and that's the last thing this market needs from the standpoint of calming it down a little bit,” said David Finnis, national property practice leader with Willis North America Inc. in Atlanta.

Willis is predicting on average up to 15% rate decreases, with “high attractive accounts” probably experiencing more, he said.

“For FM Global, we have a membership credit going right now, and that gives us a bit of benevolent tail wind,” FM Global's Mr. Schreitmueller said. “It's a $465 million credit that's being returned to our clients, and that is on average probably about an 11% credit being applied at renewal. It varies by account tenure.”