From the November 2011 issue of Investment Advisor • Subscribe!

Sticker Shock: Insurance Rates Expected to Rise

As reinsurers increase their premiums, so will property/casualty insurers. Indeed, many have already begun

Advisors already know that 2011 has been a tough year for insurers. Losses from catastrophic storms, earthquakes and the nuclear disaster at Fukushima have resulted in the first half of the year being the most costly six months in the history of the insurance industry—some 323 years. And that’s before losses from Hurricanes Irene and Lee, which wreaked billions of dollars in damage from flooding, rain and wind across the Eastern seaboard.

Reinsurers are going to be raising rates, thanks to a combination of expensive disasters and low interest rates, and property/casualty insurers won’t be far behind.

Reinsurers’ rates have fallen worldwide in four of the past five years, according to the Guy Carpenter World Property Catastrophe Rate On Line Index, thanks to, among other things, moderate loss activity and substantial industry surplus. But by July 2011 that was changing, as numerous expensive catastrophes and a poor economic climate eroded reinsurance-dedicated capital. A changing catastrophe model added a further variable into the mix and has already affected how catastrophe bonds are written, according to A.M. Best.

The size and expense of insurable events in 2011 had already led reinsurers to say in an early September Bloomberg report that they would be raising rates, despite the poor economic situation globally. They are also taking steps to mitigate other risks, such as moving investments to higher ground, as Lloyd’s of London did when it moved funds out of eurozone banks with exposure to Greek debt lest those banks fail.

It’s not just expensive natural disasters that necessitate a move to higher premiums. Low interest rates are another major factor and have kept reinsurers and insurers alike from keeping comfortable margins through investments. The financial crisis hurt insurers as well as investors, and the absence of major disasters for a brief time kept premiums from escalating. Now, however, Brian Gray, the chief underwriting officer at Swiss Re, said in the Bloomberg report that “[t]he fat is gone” and underwriting must tighten to make up for it. Meetings in September and October were expected to see negotiations on rates between reinsurers and insurance companies.

In an interview, Richard Attanasio, vice president of property/casualty ratings at A.M. Best, said that most of the pricing increases seen so far can be chalked up to property insurers rather than casualty insurers, and that while some companies are declining to write coverage in certain areas, others are increasing premiums to cover higher risk. And, of course, every state is different in its evaluation of rate increases, which injects further diversity into coverage availability and price.

Anecdotally, Attanasio said, he has heard of 10% to 20% increases from insurers, but “it varies by where the business is located and the characteristics of the risk.” Property lines in general, he says, are “very volatile,” with increases across the board, but some of those increases can be “relatively modest.”

Companies are also doing more segmentation of risk, says Attanasio: “We saw that in auto [insurance] a few years back.” Using multivariant analysis, he says, the pricing of each risk is becoming more and more sophisticated. With new technology, he adds, the ability to get information on homes and property is much better than it was several years ago, which is leading to more sophisticated pricing models. “Some people,” he points out, “might actually get lower rates.”

That said, those in hard-hit coastal areas or regions beset by floods, earthquakes or tornados might have to shop around, says Attanasio, or resort to a state-run residual market if they fail to locate appropriate coverage any other way. Attanasio advises consumers to be sure they understand their policy. How much will it cover, and what are the sublimits? What won’t it cover? Standard policies exclude other things besides floods, and with the cost of coverage on the rise, it will be more important than ever for an insured to be sure that the policy he buys covers what he thinks it does.

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