Toughest rates reserved for cat-prone areas

The calendar might say it's a new year, but 2007 is the same old market as 2006 for commercial property insurance.

That means that catastrophe-exposed accounts renewing during the year-end renewal period continue to encounter significant rate increases, market observers say. While the rate of increase has decelerated somewhat, further relief appears likely later rather than sooner, say observers.

But for noncatastrophe-exposed accounts such as those in the Midwest, rates remain steady and, in some cases, have dropped.

Still, questions remain. For example, the future of the federal government's terrorism insurance backstop is uncertain despite the pledge of the incoming chairmen of the two congressional committees with jurisdiction over the program that they intend to approve legislation extending the program—which was initially created by the Terrorism Risk Insurance Act—long before its scheduled Dec. 31 expiration.

But for the most part, it's still a tale of two marketplaces.

On catastrophe-exposed property, clients are seeing a 15% to 35% increase, depending on "how cat-exposed your program is," said Mike Hudson, managing director-global property practice for Marsh Inc. in Los Angeles. He stressed that was an average with some accounts renewing "way above that."

"We are starting to see just a little bit of moderation," he said, adding that the moderation is "not that dramatic." Mr. Hudson said that he doesn't "expect any real abatement to take place until maybe the second quarter."

The cat-exposed market "is still moving upward, we're seeing rate increases in the 20% range," said Kevin Kelley, chairman and chief executive officer for Lexington Insurance Co., a Boston-based unit of American International Group Inc.

There's "more pressure on rate of noncat-exposed" accounts, he said.

"The market's two markets—cat market and noncat. In total we see rates in the plus 10% to 15% range," said Tim Rose, president of Liberty Mutual Group's Liberty Mutual Property unit in Weston, Mass. Mr. Rose said the noncatastrophe market is competitive but catastrophe and wind-prone risks remain "very tight" in terms and conditions with higher prices, higher deductibles and, in some cases, sublimits on wind-exposed accounts.

There is a hard wind-exposed market from Texas to the Carolinas "and fairly hard market in California quake," said Ed Radzinski, vp of Chubb & Son Inc. and worldwide property manager at Chubb Commercial Insurance in Whitehouse Station, N.J. "I have not seen the Northwest hardening significantly, a little bit of hardening but nothing like California quake."

The rest of the United States is "fairly competitive," with some prices dropping on an account-by-account basis," Mr. Radzinski said.

A "typical" standard lines account is experiencing "mid- single-digit decreases," but there remains a wide variation on an account-by-account basis, said Gary Thompson, a senior vp at The Hartford Financial Services Group Inc. in Hartford, Conn. It's an "increasingly competitive market for exposures away from the coast."

Some noncatastrophe-exposed accounts are experiencing double-digit decreases, while others are "relatively flat," said Mr. Thompson. But in Florida, even standard lines are getting up to 10% wind deductibles, he said.

"Over 66% of our accounts have received rate increases over the course of the year," said Aaron Davis, director of Aon Corp.'s National Terrorism and Property Resources unit in New York. He said that the average rate increase was 33% across the entire book with a median increase of slightly less than 10%.

"We are seeing a flattening of the increases," said Mr. Davis. "The market is beginning to level to a certain degree, although in the eyes of many risk managers, that leveling isn't going to bring them back to pre-2005 levels for several renewal cycles."

A Colorado risk manager said he expects little change when his program renews Feb. 1.

"We don't know what the premiums will be in 2007," said James E. Crockett, manager-risk and benefits for Denver Water, a municipal utility. "We don't expect much of a change. Our current carrier—Liberty Mutual—is more oriented toward insuring inland risks rather than risk on the coasts."

Demographics are not on the side of clients, particularly multinationals, said Aon's Mr. Davis. Multinational companies are going to have more exposure to earthquake, windstorm and terrorism risk as they grow.

"Rates are all over the board—simultaneously going up, down and sideways depending on the profile of the risk," said Randy Schreitmueller, vp for Johnston, R.I.-based Factory Mutual Insurance Co., which does business as FM Global.

After 2005's record hurricane losses, insurers profited from a 2006 season in which no hurricane made U.S. landfall, pointed out Alexandra S. Glickman, area vice chairman for Arthur J. Gallagher Risk Management Services in Glendale, Calif.

In 2006, "the wind gods were definitely on our side and it has created opportunity for insurers to step back and stop panicking," said Ms. Glickman. "We see absolute flattening and decline in noncat property premiums, an increase in capacity and we see an absolute slowing of any rate increases for the cat peril."

She added that the "the fourth-quarter renewals saw meaningful decreases in the acceleration of rates. If the middle of the year was 50% to 100% increases, the end of the year was 15% to 20%. Much will be known after the reinsurance treaties are finalized. But the insurance industry will have a gargantuan credibility problem if they try to raise rates after having such windfall profits in 2006."

"Probably the most difficult ones to place are anything that's really large on somebody's aggregate radar screen—coastal windstorm, California earthquake," said FM Global's Mr. Schreitmueller.

"Companies are starting to pay attention to the Pacific Northwest and New Madrid as well," he said.

Supply chain issues "seem to be more and more important in everybody's mind these days," said Mr. Schreitmueller. He called the concern a function of companies seeking increased productivity. "We're dealing primarily with a large global clientele. So we may be seeing it early on."

The terrorism insurance market remains a bit uncertain in the long term, said several observers.

"I think we're reaching balance in this market, but we don't see a flood of new capacity for the cat perils, maybe 20% to 25% over the most desperate period of '06," said Gallagher's Ms. Glickman.

"The one area we don't see meaningful new capacity is in terrorism and, even though the extension of TRIA or some variation on backstop is highly likely for 2007, it does not mean that capacity will flood the market," she said.

There remain "concerns on the terrorism-target metro-area type accounts," said Liberty's Mr. Rose. "That hasn't gone away."

The terrorism market is "pretty stable right now, there has been a little bit of additional capacity come into it on stand-alone basis," said Marsh's Mr. Hudson.

The take-up rate for terrorism coverage "is up to about 57%," Mr. Hudson said.