A Stormy Outlook for Business Insurance

This year's business insurance market is all about last year's hurricanes. How will the huge losses from hurricanes Katrina, Rita and Wilma impact property insurance premiums? Will the effects of those losses spill over to other lines of coverage? And what should companies do to ensure appropriate coverage?

The answers to those questions are still unfolding. Advisen Ltd., an insurance information provider with headquarters in New York City, estimates that total worldwide insurance and reinsurance losses related to the three hurricanes will total $57.6 billion, the largest amount for a cumulative catastrophe loss on record. The combined losses from Katrina, Rita and Wilma are more than twice the total losses attributed to other natural disasters in any year on record and one and a half times the losses from the 2001 terrorist attacks in New York City and Washington, D.C.

Before Hurricane Katrina struck, the market had been easing and insurance companies were reporting strong profitability. Many observers expected the market to continue softening into 2006. In the third quarter of last year, companies' renewal premiums were 5 percent lower across all lines of coverage than in the same 2004 quarter, according to the quarterly Risk and Insurance Management Society (RIMS) Benchmark Survey. D&O premiums fell 8.45 percent, property premiums just under 6 percent, general liability 5.2 percent, and workers' compensation 3.75 percent.

"The hurricanes changed the pricing picture," says David Bradford, executive vice president of Advisen, which conducts the benchmark survey. "The only question is: How much?"

One thing is certain: For property insurance, rates are going up, and coverage terms are becoming more restrictive. Some organizations were already starting to see significant rate increases in the fourth quarter of last year. "Companies with energy-related risks saw increases in property coverage of up to 50 percent immediately after Katrina," says Bradford. "Other risk managers are getting hints from underwriters of increases of up to 20 percent, and they don't think that will stop anytime soon."

Bob Howe, director of North American property operations for Marsh Inc., a New York City-based risk and insurance services firm, agrees. "I expect to see fairly significant change in the property insurance marketplace, including tightening on coverage and sharp price increases for catastrophic risks." The outlook is bleaker for exposure to catastrophes. Companies should expect dramatic increases for catastrophic windstorm and earthquake risks, he says, and should look for more flood exclusions and changes to the definition of "flood area."

Capacity also needs to be considered. "Underwriters are becoming more cautious about capacity in coastal and earthquake-prone areas, and that will push up prices," says Howe. He adds that if supply fails to meet demand, "companies with high catastrophic exposure may not be able to get the level of coverage they want or to complete their programs."

Howe believes that many underwriters also will use more conservative modeling techniques for the risks in their portfolios. For example, the techniques many underwriters used for windstorm risks turned out to be inadequate or inaccurate following Katrina, leaving them with higher than expected losses.