“The $64,000 question here,” Al Tobin was saying, “is what type of event is a market-changing event?”
Tobin, national property practice leader at Aon Risk Solutions, was talking about the market for commercial property insurance. His point? Devastating as SuperStorm Sandy was, it didn’t have a long-term impact on the prices companies pay for such coverage. Rather than remain high after the hurricane, those rates have flattened.
The need to protect against the loss of a corporation’s assets and the interruption of its operations, however, naturally leads to speculation about the kinds of natural or human-generated disasters that could break the back of a company.
Superstorm Sandy, the 2012 hurricane that struck the Northeast, certainly had the makings of such an event, particularly to the people who lived and worked in the region. Indeed, it was one of the rare times that the term “superstorm” has been used.
To Tobin, even though Sandy was, dollar-wise, the most devastating natural disaster of last year, claiming $25 billion in insured losses, it falls short of a real game changer — in property insurance terms, at least.
The Aon broker’s benchmark for “a sustainable market change” in property coverage — a stiff upward rise in rates plus a decrease in coverage over two or three years of insurance renewals — is $100 billion in insured losses. Hurricane Katrina, at $76.3 billion in insured losses in terms of 2012 dollars, comes closer.
Don’t get me wrong. Sandy materially affected many, many businesses in New Jersey, New York and Connecticut,” Tobin says. “But what that says also is that it was a regional event, though obviously a horrible one, in that people lost their lives.”
Because the impact was geographically limited, it hasn’t had a sustained impact on the cost and availability of property insurance, the broker said, noting that an influx of capital into the property-casualty insurance business has more than covered insurance industry losses.
The influx of the new risk-bearing capacity — for casualty as well as property perils — has come in the form of at least five new players in the market, including Berkshire Hathaway. Tobin’s employer, Aon, has formed a property insurance outfit in tandem with Warren Buffett’s company.
“Now we’re seeing a little bit of a plateauing [of the market, en route] to a softening. So our advice is that it should be a buyer’s market for the fourth quarter,” he asserts.
Lori Seidenberg foresees pretty much the same outcome for the November 5 property insurance renewal she is negotiating for the apartment buildings managed by her employer, Centerline Capital Group. “We’re hoping for a flat renewal” of the property coverage, she says, even though some of the units are wood-framed and exposed to potential damage from flood and wind.
Seidenberg, a senior vice president of the real-estate management company’s enterprise risk management division, said that over the last couple of years the rates that Chubb Group has been charging for property insurance on the buildings have been “very competitive,” running from flat to a 1 percent decrease.
To get the best rates, she meets annually with underwriters, with whom she shares spreadsheets packed with information about the buildings, including replacement-cost values, square footage, construction materials and whether or not they have sprinkler systems to prevent fire damage.
“It’s always about providing good quality data to the underwriters so that they can provide a competitive and accurate quote,” Seidenberg says.
Nevertheless, Sandy still lingers as a significant event for the companies that were affected by it. “Larger companies with significant Superstorm Sandy losses are facing larger increases in property rates,” according to Sam Coburn, a senior managing director at Crystal & Company, a risk management consultancy.
Overall, companies with catastrophic risk exposures may be hit with price hikes of 5 percent to 15 percent, he wrote in an e-mail to CFO. “The only exceptions to this are major accounts that suffered significant losses associated with Superstorm Sandy. In these cases, the catastrophic risks could experience rate increases greater than 15 percent,” he wrote.
The availability of property insurance isn’t an issue for corporate buyers right now, insurance market participants say. But property insurers remain touchy about natural disasters. Most property insurers are decreasing coverage and increasing the deductibles companies must assume in high-risk flood zones, according to Coburn.