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Rate hikes likely as insurers face string of catastrophes

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COLORADO SPRINGS, Colorado — Underwriters will be pushing hard for rate increases across several lines of business in the next few months, particularly for catastrophe-exposed property risks, insurer and brokerage executives say.

The recent string of hurricanes in the United States and Caribbean, earthquakes in Mexico and other storm losses earlier in 2017 ended a four-year run of limited catastrophe losses, which was accompanied by a cumulative 50% drop in property insurance rates, they say.

As a result, insures will likely push for double-digit rate increases on average for properties in storm- and quake-exposed areas of the U.S., but other lines of coverage, including noncatastrophe property and general liability, could also see higher rates, according to executives meeting at the Insurance Leadership Forum, sponsored by the Council of Insurance Agents & Brokers, in Colorado Springs, Colorado, earlier this week.

The ILF is one of the biggest annual meetings of insurer, reinsurer and brokerage executives. Held at The Broadmoor resort, the event is composed largely of numerous individual meetings between senior executives where they discuss market trends and other business.

Whether rate increases will ultimately go through or be sustained remains uncertain because insurers and reinsurers still have plentiful capital, and more alternative capital is waiting on the sidelines ready to come into the market if rates rise, several executives said.

In addition, the final tally of the 2017 aggregate catastrophe losses remains unclear with wide bands of estimates from catastrophe modeling firms. While some of the largest insurers have released loss estimates for the catastrophes — including American International Group Inc., which earlier this week said it expected net pretax third-quarter catastrophe losses of about $3 billion — other insurers have yet to announce their estimates or have made only partial estimates.

In particular, many in the market are waiting to see how big Lloyd’s of London’s loss from Hurricane Maria, which devastated Puerto Rico, will be. Late last month, Lloyd’s said it expected losses of $4.5 billion for syndicates in the market from hurricanes Harvey and Irma, but it has not yet released its Maria estimate, which many expect to be sizable.

The huge variation in market loss estimates is producing equally large variations in the amount that insurers say property rates need to rise for catastrophe-exposed accounts, said Mike Rice, CEO of JLT Specialty USA, a unit of Jardine Lloyd Thompson P.L.C., in Denver.

“We’re seeing some markets saying rates need to go up 8% or 9%, others saying 18% or 19%, and others saying 50% or 100%,” depending on their view of what the ultimate aggregate loss will be for the year, he said.

Already, some rate increases have been applied for Oct. 1 property renewals, where increases have been in the high single digits to low double digits for property accounts, Mr. Rice said.

“That’s mainly for multifamily and commercial habitational risks, but it’s affecting anybody that has a cat exposure,” he said. “Flat is the new low. If you get a flat increase, you’re doing a great job in this market,” Mr. Rice said.

“There’s still a lot of accounting that needs to be done, but the industry has been underpricing the product for two or three years. So after three major (wind) events, you are going to have a pricing reaction,” said Christopher Swift, chairman and CEO of Hartford Financial Services Group Inc.

The ultimate effect on primary insurance rates may not be clear until after the Jan. 1, 2018, reinsurance renewals, he said. The Hartford’s catastrophe reinsurance program was not affected by the recent hurricanes, so it is expecting to see little change in reinsurance rates, but on average reinsurance rates may rise 10% to 15% at year-end, Mr. Swift said.

Retrocessional reinsurance rates — the reinsurance coverage that reinsurers buy for their own books of business — are likely to increase, said Mike Schnur, Chicago-based partner at reinsurance broker Tiger Risk Partners L.L.C.

“Our sense is that retro will be up substantially — double digits — but it’s early days to know much more than that,” he said.

Property insurance rates have declined in recent years on the back of low reinsurance costs, said Jim Henderson, chairman and CEO of Lake Mary, Florida-based brokerage AssuredPartners Inc. “That seems to be changing, so while we have not seen increases yet, they’re in the works,” he said.

“Clearly there’s a recognition that the market needs to see some correction,” said Paul Kim, managing director and co-chief broking officer at Aon Risk Solutions in New York. But only about one-third of insurers have reported their catastrophe loss estimates for the third quarter, so it’s too early to tell the level and extent of rate increases, he said.

In addition, some insurer and alternative capital providers may seek to increase their capacity if rates rise, Mr. Kim said.

“One of the key issues that we are recommending for our clients to consider is the claims handling philosophy of carriers … If they handle the hurricane claims well, then those are the carriers that clients should continue to do business with,” he said.

Generally, the market remains orderly, and for most insurers the 2017 losses will be an “earnings event, not a balance sheet event,” said Eric Joost, global head of property/casualty at Willis Towers Watson P.L.C. in London. And more capital may come into the market, he said. “You still have some providers of alternative capital with dry powder on the sides waiting for something like this, so there are dampening effects.”

“These types of events show that the world is risky and getting riskier, and I think they make people realize that we need to get a little more rate,” said Mike Foley, CEO of North America for Zurich Insurance Group Ltd.

Mr. Foley is retiring from Zurich early next year and is exploring opportunities in the insurtech area.

While alternative capital remains interested in insurance, “this will be an interesting test of (that capital) and how much they want to re-up,” he said.

Property rate increases are already being quoted in the excess and surplus lines market, said Daniel J. Kaufman, corporate senior vice president and managing director at Burns & Wilcox Ltd. in Farmington Hills, Michigan. “Carriers are throwing them out to see what sticks,” he said.

Going forward, property rates will likely increase about 10% on average and increases — or at least a leveling off or decreases — may extend to the general liability market, he said.

“In GL, the bleeding has stopped and rates will be flat at the very least going into 2018,” Mr. Kaufman said.

Pricing beyond property will likely be affected by the change in the market, said Mark E. Watson, president and CEO of Argo Group in Pembroke, Bermuda.

“There’s a recognition that we’ve let the price of the risks that we all assume drift a little bit … there are a lot of lines that are thin or underpriced,” he said.