Property Insurance

Let’s hear it for the free market! Seen at Business Insurance:

Florida property catastrophe reinsurance rates will likely fall by 15% on average during mid-year renewals, according to a report released by Guy Carpenter & Co. L.L.C.  [...]

The sharpest price decreases include 18% to 25% reductions for the higher layers of reinsurance, attaching above the Florida Hurricane Catastrophe Fund, according to the report.

Lower layers of reinsurance, below the FHCF, are declining by 7% to 10%, while private reinsurance layers usually placed alongside the FHCF are decreasing by 12% to 15%, compared with June 1, 2007, renewals, according to the report.

I know that a lot of reinsurance departments at property insurers are looking forward to a bit of relief, given the softer market and a couple of relatively quiet years in North America. (Yes, it’s been a bad tornado season , but such storms don’t generally impact cat reinsurance industrywide.)

I expect that regulators in certain states will also welcome the news that primary insurers will see a little relief.  I do wonder, however, if regulators will remember that it’s difficult to reduce rates when increases requested in part due to increased reinsurance expense weren’t fully granted in the first place.

On Friday, this article appeared in the Guardian:

Lloyd’s of London warned yesterday that an absence last year of natural disasters or man-made accidents was putting pressure on firms to reduce premiums in 2008.

The world’s oldest and biggest insurance market said that though the lack of major disasters had allowed firms to push up profits 5% in 2007, underwriting margins were being squeezed.

As much as I like hard markets (they’re good for those of us in the industry whose bonuses are at least partially tied to profit!), of all the problems to have…market softening due to a lack of large catastrophes is a nice one to have.

Besides, soft markets present a different set of challenges with which us crazed actuaries can be entertained.

So, while the attention of the Mississippi legal and insurance communities has been focused on the Scruggs circus, it looks like a bit of work has still been going on elsewhere in the state. For example, consider
this story at Insurance Journal:

California-based law firm Irell & Manella reports it has won a partial summary judgment on behalf of national gaming operator Pinnacle Entertainment Inc., in an insurance coverage case arising out of Hurricane Katrina.[...]

In August 2005, Pinnacle’s facility in Biloxi, Miss., sustained property damage and business interruption loss.

According to Irell & Manella, two of Pinnacle’s insurers, Allianz Global Risks U.S. Insurance Co. and RSUI Indemnity Co. (together providing more than $100 million of excess coverage), took the position that coverage for all storm surge damage falling within their policy layers was precluded by flood exclusions contained within their policies.[...]

After a two-hour oral argument on the motion, Judge Sandoval took the motion and cross-motions under submission. On March 26, he issued his ruling in Pinnacle’s favor.

The IJ article reads like this is a case of a Mississippi judge rewriting property insurance contracts after the fact. However, while that is an attractive thought to someone in the industry…I don’t think that is actually the case here. IJ skipped over a key paragraph in Irell and Manella’s press release:

According to Pinnacle’s CEO Dan Lee, “Pinnacle has always maintained that it has coverage for flood and other related damage caused by Hurricane Katrina. We specifically bought $400 million of coverage for Weather Catastrophe Occurrences like Katrina, including any resulting flood. We have been extremely disappointed that it has taken a lawsuit to convince our excess insurers of this fact.”

The phrase “Weather Catastrophe Occurrences” is the telling phrase here. A “Weather Catastrophe Occurrence” peril is a feature of some property insurance contracts written by London brokers. It’s my understanding that, at least at the time of Katrina, it was not uncommon for London to exclude Flood but provide coverage for the specific peril of “Weather Catastrophe Occurrence”, which in the case of a hurricane, arguably includes storm surge.

I’ll make an educated guess that the excess property carriers, Allianz and RSUI, issued “follow-form” excess contracts. They probably provided their own exclusions of the flood peril…but didn’t exclude WCO since WCO isn’t a peril you normally see on primary contracts written by American insurers.

The insurers likely tried to argue that the flood exclusion was unambiguous and superseded all other perils. However, I’d bet that either “flood” was not redefined in the excess contracts, or that the judge thought the flood exclusion was ambiguous when it comes to WCO. Ambiguity tends to be interpreted in a manner favorable to the party with the shallower pockets.

Moral of the story: If you’re an excess insurer, you need to be familiar with the language of the forms you’re following, and either price or exclude accordingly.

Via All Headline News:

To address a state budget deficit of $14 billion for 2008, California Governor Arnold Schwarzenegger is proposing a variety of measures including a 1.25 percent levy on real property insurance policies. The state’s insurance industry is said to agree to the proposal to collect $12.50 for every $1,000 insurance premiums purchased in the state. He announced the measure at his fifth State of the State address on Wednesday.

The measure is expected to raise $125 million, to fund a larger state fire fighting unit including more crew, helicopters, fire engines and satellite tracking devices. A few years ago, San Diego voters often hit by bushfires, rejected a proposal to imposed higher local hotel taxes to improve the state’s firefighting capability.

Tax hikes suck, but at least this proposed hike seems to involve a logical connection between what’s being taxed and what the revenues will be used to fund.

Seen in the Economic Times:

MUMBAI: Property insurance rates fell by as much as 75-80% on the first day of free pricing in the general insurance market. Non-life insurance companies have started quoting rates aggressively with all price controls out of non-life sector.

The new regime has brought to centrestage the broking community who, until now, played a small role. By helping corporates get the best deals, brokers have driven down the price for medium- and large-sized companies.

A couple of thoughts come to mind.

On one hand, this is an entertaining bit of news to keep in the back pocket for the next time a consumer advocate demands increased insurance rate regulation due to allegations of price gouging by the industry.  Free competition leads to reduced prices; whodathunkit?

On the other hand, the idea of such sizable price discounting would lead me to be concerned about whether these changes are reasonable, or true nuttiness and an absence of pricing discipline in a quest to buy market share.

Fortunately, I don’t work work with a business that writes much property insurance in India, or else I’d be reaching for a map of Indian catastrophe risks and some Pepto.