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4th Quarter 2007 Insurance Market ReportFall 20074th Quarter 2007 Insurance Market Report 2008 approaches with substantially increased capacity for all property perils and continued double-digit rate decreases. Insurers are fighting for market share, but there is a premium floor based on SOX requirements to model and manage aggregates. Expectation is that 2008 will bring rates back to “Pre-Katrina” pricing. The Federal Terrorism backstop is expected to be renewed by 12/31/07 with most experts believing that a 5-7 year extension will be the end result. The distinction between Certified and Non-Certified is expected to be eliminated. The addition of Nuclear, Biological and Chemical is still being debated, but most believe it will not be included. Substantial capacity is available, and carriers appear to be calming down as respects aggregation fears. Sub-Prime meltdown impacting E&O/D&O pricing and capacity. Underwriters are aggressively scrutinizing organizations that have even the slightest relationship to debt origination and placement and are requiring more detailed information on income generation. TIC’s are also receiving additional underwriting attention given IRS uncertainty. Premiums are firming, but preferred risks are still seeing reductions. “Side A” coverage is now purchased by most boards. Employment Practices Liability moves to the forefront. New claims by third parties and tenants are alleging discrimination, wrongful termination, etc. There is a definite need for this coverage in the Real Estate industry. Concern grows for E&O claims against insureds whose investors are not seeing the returns originally represented in development/investment deals. “Errors and Omissions claims are still a factor in the real estate sector with many settlements made outside of the courtroom. Architects & Engineers coverage for condo projects remains a critical exposure with most A&E’s having exclusions or significant limitations for condo projects. International growth leads companies to examine property, casualty and political risk exposures. Uncertainty in China has many political risk insurers refusing to write new coverages for development. EU, Japan, and India are key targets for expansion, with multiple choices for insurance solutions. ADVICE Recognize that insurance is cyclical and subject to external conditions. Exercise caution in projecting costs beyond a two-year horizon. Development slowdown brings rate decreases for both commercial and condo projects. Premiums are falling anywhere from 10-30% with wrap-ups seeing more carrier competition. New capacity has increased significantly with 25 carriers now committed to the market. Non-Construction liability capacity is growing and leading to 15%+ rate decreases for many insureds. New markets and real estate liability programs are available to many organizations. Environmental insurance is part of the mainstream. The Ability to “pass through” to tenants opens the door for increased capacity and competition among financially sound carriers. Underwriters are focusing on due diligence and maintenance plans. Mold for multi-family remains the most difficult class to insure, but some carriers have begun to offer limited coverage. On the terrorism front, many established carriers are expanding coverage to include biological and chemical attacks. Some carriers are now willing to negotiate the definition of mold to include non-nuclear airborne contaminants released in a terrorist attack. The majority of CMBS lenders are now allowing S&P A+ capacity for property and casualty placements. Backstop options are limited and expensive for clients whose lenders require utilization of AA carriers. Captives and alternative risk vehicles are slow in popularity as the conventional market softens and concerns grow about unwinding them in a post-sale situation. The focus on Terrorism captives is losing luster as lenders want to see “transparent” capacity. “Side Cars” and opportunistic capacity are leaving the market because of continued premium slide. If 2008 brings catastrophic losses, then capital may return. Surety capacity will remain flat with additional personal guarantees and recourse becoming standard. CONSENSUS 2008 will be a year of premium relief for clients based on insurers’ profits. Lenders may seize the opportunity to require higher limits due to decreased pricing, but caution is critical in the event market conditions change quickly and capacity becomes restricted. We’re on the Web! www.ajg.com/realestate. |
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