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Difficult market tops E&S concerns

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CHICAGO—A capacity crunch hindering property insurance arrangements for catastrophe-prone regions of the United States dominated conversations at the 2006 Annual Convention sponsored by the National Assn. of Professional Surplus Lines Offices Ltd.

Surplus lines brokers, managing general agents and insurers meet at the convention to solidify their business relationships, discuss ongoing coverage arrangements and seek out new ones.

Discussions on an ongoing slide in casualty rates also shaped the thousands of meetings held in Chicago, but "turmoil" in the property catastrophe insurance arena topped the discussions, NAPSLO members said.

Even Victor O. Schinnerer & Co. Inc., an underwriting manager that specializes in professional liability programs and does not underwrite property coverage, was beset by brokers wanting to discuss the difficult property markets they face.

That shows how much property conditions are weighing on excess and surplus lines professionals, said Lorna Parsons, managing director for Victor O. Schinnerer in Chevy Chase, Md.

The difficult property catastrophe market resulted from a re-evaluation of windstorm and earthquake risks following last year's hurricane season, observers say. Catastrophe model companies changed their potential loss estimates and that prompted rating agencies to modify their assessment of insurers' and reinsurers' exposures, which in turn pushed insurers and reinsurers to reduce those exposures (BI, June 12).

Additionally, the nation's largest personal lines insurers have since used their massive purchasing power to buy up available reinsurance capacity, said Gary L. Tiepelman, a NAPSLO director and senior vp of underwriting for Scottsdale Insurance Co. in Scottsdale, Ariz.

"You could charge what you want (for property catastrophe insurance) if you had the capacity," Mr. Tiepelman said. "The problem is there is not a lot of capacity out there."

During past tough market cycles, brokers could at least show insurers a risk and if insurers thought it was an appropriate opportunity, they would underwrite it, added J. Neal Abernathy, president and chief executive officer in Atlanta for Swett & Crawford Group.

"Today, it doesn't matter whether they want to respond or not," Mr. Abernathy said of insurers. "They just don't have the capital."

Brokers and insurers say many buyers are increasing their retentions, reducing the limits they purchase and even going bare. Accounts that find coverage are paying the price.

An earthquake-exposed California account that paid $25,000 per $1 million in coverage last year might pay $100,000 for that same cover today, depending on the account's specific location, the age of its buildings and the soil type they sit on, said Ronda Whaley, a property broker for wholesaler Brown & Riding Insurance Services Inc. in Los Angeles.

With such conditions, many NAPSLO attendees wondered whether any relief is in sight.

Insurers, in general, will have a tough time explaining current property rates if this year's hurricane season passes without causing significant damage, said Jeffrey A. Segall, vp in Chicago for CNA Financial Corp.'s E&S unit. On the other hand, CNA is unlikely to base its rates on just one good year, Mr. Segall noted.

"I don't see any one factor that is going to change the (current) business condition" for either property or casualty insurance, said John F. Jennings, president of Tri-City Insurance Brokers in New York, a unit of BISYS Commercial Insurance Services Inc.

During last year's NAPSLO meeting, shortly after hurricanes battered the Gulf Coast, attendees speculated that storm losses might also boost casualty rates, noted Brett Woods, president of Brett Woods & Associates in Dallas, a unit of U.S. Risk Insurance Group Inc.

"The opposite happened," Mr. Woods said. Casualty underwriters today are willing to cut rates and write riskier excess and surplus lines accounts than a year ago, he said.

Some casualty risks are getting written at or below insurers' break-even point, said Brian Evans, E&S risk leader in Overland Park, Kan. for Swiss Reinsurance Co.'s Commercial Insurance.

Casualty rates, in general, however, are decreasing only slightly, Mr. Evans said.

For example, some construction contractors and habitational risks are seeing slight decreases for liability coverage while some manufacturing entities are seeing flat or slightly increasing rates, Mr. Evans added.

Some of the largest decreases for E&S casualty insurance have come for premises liability risks, said Denise Morris, senior vp of U.S. excess liability umbrella for Liberty International Underwriters in San Francisco.

Pricing for those risks has dropped 20% to 30%, according to LIU. For example, self-insured retentions that had been $25,000 or $50,000 have dropped as low as $2,500.

E&S casualty rates are decreasing only slightly without much in sight to change the scenario, said James C. DeSimone, New York-based senior vp of specialty casualty for Zurich Financial Services Group.

"There is nothing that I can see on the horizon that would be a make or break move in the E&S casualty business," Mr. DeSimone said.

With more standard insurers entering E&S territory, such as for architects and engineers liability coverage, many surplus lines brokers, insurers and managing general agents are seeing their sales and bottom lines flatten out, said Alan J. Kaufman, chairman, president and chief executive officer for Burns & Wilcox Ltd., an MGA based in Farmington Hills, Mich.

Therefore, E&S brokers and insurers are looking for areas where they can expand, making for a competitive marketplace, Mr. Kaufman said.

"They are all chasing the same products to sell, looking for what is not going to get gobbled up by the standard markets," he said.