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Property risks see wide-ranging rate cuts

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Property risks see wide-ranging rate cuts

The wildly varying commercial property renewals of midyear 2006--in which policyholders with catastrophe exposures scrambled to find coverage while those with standard risks enjoyed a benign market--has given way to much more balanced renewals in 2007, say risk managers, brokers and underwriters.

Rates for catastrophe-exposed property, which skyrocketed after 2005's costly hurricane season, have calmed. Today, rate decreases are the norm for most property exposures, regardless of the catastrophe exposure, they say.

Rates have been dropping by double digits, according to market experts. But they caution that another bad hurricane season--which is just what long-term forecasts predict--could send property cat rates skyward again.

But for this year's midyear renewals, risk managers found a buyer's market, courtesy in part of 2006's unusually quiet hurricane season.

"Property renewals were pretty benign this year," said John Phelps, director-business risk solutions for Blue Cross/Blue Shield of Florida in Jacksonville. "Our retentions remained the same. Premiums were the same or very slightly less. I think that's due in large part to the lack of hurricanes producing significant property damage."

In addition, the health insurer's property premiums were kept in check by running its exposures through a catastrophe model, he said. "At the recommendation of our broker--Marsh--we had them produce a catastrophe model using several scenarios. Our carriers also did two models. That was instrumental in keeping our cost increases for property insurance at bay."

This year's renewals were significantly easier than last year, said Scott Clark, risk and benefits officer for Miami-Dade County Public Schools in Miami.

This year he was able to fill holes in his program. "My goal was to try to, even with the increased valuation of my property by 10%, to try to keep the pricing for that $200 million in the same range regardless of the increase," said Mr. Clark.

At its May 1 renewal, the school system obtained the $200 million in limits at a slightly lower price than last year and added an additional layer of coverage.

"I wanted to see if I could add a $50 million layer. As of early June, I had $32.5 million subscribed. Looks like we're going to compress that $50 million layer into a $32.5 million (layer) and then add $12.5 million layer above that," he said.

Montgomery County was also able to enhance its coverage at a lower premium, said Terry Fleming, director-division of risk management for the county in Rockville, Md.

"I think a lot of frenzy in the marketplace has calmed down because we had a relatively calm hurricane season," said Mr. Clark.

Brokers agreed.

"2006 was a very benign hurricane season....(Insurers) were collecting all-time highs on the rate side and no major catastrophes to speak of," said Cliff Simpson, executive vp-national property practice in the Atlanta office of Glen Allen, Va.-based Hilb Rogal & Hobbs Co.

"In a sense, the insurance industry cried wolf in 2006 in anticipation of a bad wind year. It didn't materialize and, as a result, pricing is appropriately coming down for wind for by 20% to 30% in many cases with higher limits available," said Alexandra Glickman, area vice chairman for Arthur J. Gallagher Risk Management Services in Glendale, Calif.

Underwriters realized that it would be impossible for them to demand the same pricing that they did last year, she said.

"The profits have been astronomical," she said. "There's a PR issue. The financial markets are such that we all understand supply and demand. At this point, the markets for nat cat and Tier 1 wind and California earthquake made substantial profits in those lines and have to deploy their capacity if they want to stay relevant."

The market began to change direction in the last quarter of 2007 and there is no sign of any hardening, said Al Tobin, property practice leader for Aon Corp. in New York.

The market is "extraordinarily competitive," he said, and both cat-exposed and non-cat exposed accounts are experiencing double-digit rate cuts.

Only the gaming and hospitality sectors are finding the going a "little bit tougher" than many other market segments.

The market "remains very competitive across the country except for the obvious catastrophe-exposed areas," said Tim Rose, president of Liberty Mutual Group's Liberty Mutual Property unit in Weston, Mass.

Geography tends to determine any differences, Mr. Rose said. There is "definitely strong competition in the Midwest, less competition in Florida."

"We're seeing softening in general. The percentages vary in large part in the type of business," said Dan Loris, senior vp-property at Zurich North America Commercial in Schaumburg, Ill. "We're seeing greater softening in the large-accounts world than the small-accounts world." There's softening on the catastrophe side as well as the non-cat side, he said.

Last year, cat-exposed accounts endured the biggest rate increases, and now they're experiencing the biggest decreases, said HRH's Mr. Simpson. He added, though, there has been a fundamental market change in the cat business. "I believe we're not going to see pre-Katrina rates for a long time because a new floor as been established."

Rates will "move within a new bandwidth," said Steve Sachs, senior vp in HRH's Columbia, Md., office.

"In the U.S., companies with significant nat cat exposures probably have to keep the bottle of Alka Seltzer close at hand," said Randy Schreitmueller, vp at Johnston, R.I.-based Factory Mutual Insurance Co., which does business as FM Global.

Underwriters and brokers warn that a significant loss--whether natural or man-made--could turn the market, although how large a loss would be necessary to do so remains unknown.

"We're early in the year--let's see how the storm season develops and hope things go as they did in 2006," said Mr. Schreitmueller.

A $25 billion to $35 billion event would have less of an impact than Hurricanes Katrina and Wilma, said Aaron Davis, director of Aon's National Terrorism and Property Resources unit in New York. "The market would be in a better position to withstand" such a shock than it was in 2005, he said.

"A lot of it will hinge on what happens," said Zurich's Mr. Loris. "We're one loss away from talking about the hard market" on the cat side, he said.