During the last several months, the property insurance market has seen a dramatic increase in premiums for catastrophic perils, including windstorms, hurricanes, cyclones, typhoons, and earthquakes.
To help minimize their risk, insurance companies that write coverage for these perils in high-risk areas rely on purchasing reinsurance from a small and dwindling group of carriers.
According to Michael Perry, vice president at DLD Insurance, as fewer insurance and reinsurance companies provide catastrophic property insurance, premiums have skyrocketed, especially in high-risk areas.
“With the recent increase of major storms and other catastrophic events, it’s become more difficult for insurance companies to predict the risks, and many companies are simply afraid to write the policies,” he says. “And with fewer insurance and reinsurance companies writing policies, it comes down to basic supply and demand, which leads to higher premiums.”
Smart Business spoke with Perry about the reasons property insurance rates have skyrocketed and steps businesses can take to keep their rates under control.
Why have catastrophic property insurance rates skyrocketed?
We’ve seen a significant decrease in the number of insurance companies and reinsurance companies that offer catastrophic property insurance, resulting in an imbalance between supply and demand. The main reason this has occurred is the large number of named storms that have hit the East and Gulf coasts in recent years and forecasts that this trend will continue.
Mainly as a result of Hurricane Katrina last year, many of the reinsurance carriers providing financial backing to the commercial property insurance companies had to pay well over twice what they had predicted for the year. This increase in claims payments by the reinsurers has forced the reinsurance market to decrease the amount they can write going forward so they can stay in line with their surplus to exposure ratios required by the various insurance rating agencies.
There’s also a growing concern about the potential for a large earthquake on the West Coast due to the lack of earthquake activity since the Northridge Quake in 1994.
And lastly, we’re seeing a higher concentration of property values, including more expensive homes, greater population and large valued energy related assets, in the affected areas.
For all of these reasons, many insurance companies are passing the risk on to the insured by way of decreased capacity and increased pricing.
Who is most affected by these rising rates?
While catastrophic property insurance rates are increasing across the board, businesses on the coasts are especially feeling the sting. In particular, large property owners and manufacturers with distribution centers located in the West Coast, due to earthquake exposure, and the East and Gulf coast areas, due to hurricane and windstorm exposure, are being affected.
How can businesses keep their rates manageable?
Businesses should work with their broker to get into the marketplace sooner rather than later — and they shouldn’t wait until just before their renewal date. Also, businesses can sometimes get a break on their premiums if they can show that they have disaster plans in place. Demonstrating the ability to move products out of the path of a hurricane, protect property in a major storm or ensure that buildings have been retrofitted to survive a hurricane or earthquake can do this.
Businesses should also take a close look at how their insurance policy is structured. If they are willing to take on more of a financial risk by increasing their deductibles or self-insuring certain locations, they can potentially see premium savings. Businesses may also want to look to alternative property programs for covering inventory against catastrophic perils.
How can businesses obtain the most competitive rates?
It’s important that they work closely with their broker to determine a marketing strategy and ensure their broker is going to all available markets when researching carriers. Where a business may have used three carriers to cover their risks, due to the decrease in capacity of each carrier, five, six or seven may be needed to obtain the appropriate coverage for total insurable values. Working with a broker that knows how to fully utilize the marketplace is key.
How have rates for other types of insurance fared?
Non-catastrophe property insurance rates are increasing slightly while casualty insurance, which includes general and auto liability, is in the midst of a market cycle that has resulted in slight decreases in the cost of premiums the past few years. However, this may soon change as we expect to see slight increases in casualty premiums in the coming years.
Thanks to California reform measures introduced a few years ago, Worker’s compensation is seeing drastic reductions in premiums. In the directors & officers line, while premiums have continued to decrease, the rate of decline has flattened over the past year or so.
MICHAEL PERRY is a vice president at DLD Insurance. Reach him at [email protected] or (949) 553-5686.
