Insurers Stuck Between Rising Costs And Suffering Customers

Forget about tropical storms as this year's hurricane season gets underway. Insurers are nervously eyeing a more immediate problem: The squeeze of stagnant insurance prices.

Hurricanes typically account for the biggest losses insurers face, and a big storm season usually pushes insurers to raise prices. By any measure, 2008 was bad: $26 billion in catastrophe-related claims, $11 billion of that caused by Hurricane Ike, for the third-worst total ever for insured natural catastrophe losses.

Yet, insurance rates haven't risen in the aftermath. Today, at a time when contracts for catastrophe coverage are being renewed, rates are actually down a bit, except for limited increases in a few of the most exposed areas. There are no signs of prices elsewhere hardening.

Many insurers "don't have as much capital as (they) had before. At the same time, your return on equity has gone down," both of which should dictate higher pricing for commercial insurance, said Shivan Subramaniam, chief executive of FM Global, a mutual property insurer, told Dow Jones Newswires last month. "The issue becomes what are the clients going to do."

Clients who buy commercial insurance against property and liability losses are cutting back, putting a damper on insurers' efforts to raise prices. So insurers are having difficulty recouping prior-year losses and covering the rising cost of the reinsurance they buy to offload some of the risk of huge catastrophe-related claims.

For homeowners, state insurance regulators have taken a hard line against insurer requests to raise rates, particularly in Florida, where the state runs the largest insurer.

Insurance broker Marsh & McLennan Cos. (MMC) estimated last week that June reinsurance treaty renewals for Florida catastrophe coverage were up around 15%, raising costs for insurers. "The fine balance between supply and demand" is keeping reinsurance rates from rising even more, said Kevin Stokes, executive vice president with Guy Carpenter, Marsh & McLennan's reinsurance brokerage unit.

"The customer is saying we're hurting and we don't have the money to pay for increased insurance costs," said David Pagoumian, chief executive of Napco, a New Jersey-based wholesale broker of property insurance for commercial accounts. "Insurance companies are having to bear the higher costs internally" rather than pass them along to commercial customers, as they have in past years.

That fine balance between reinsurance costs and customer reaction resulted in the verdict by property insurers at a Standard & Poor's insurance conference last week that there are no signs of a hard, or rising, property/casualty market, according to Jay Gelb of Barclays Capital.

"Concerns are evident that the industry's excess loss reserve position is eroding after two years of significant reserve releases, and the consensus view is that the 2008 accident year's casualty reserves will probably be deficient," said Gelb in a Wednesday research note.

Pagoumian said that insurers he talks to are cutting back to try to run a more efficient operation, and are paying attention to underwriting procedures to try to minimize their exposure to potential big losses.

The latest hurricane forecast issued Tuesday by Colorado State University calls for a slightly below-average Atlantic hurricane season, with two major hurricanes developing in the season that began Monday. That could prove helpful if a mild season reduces catastrophe losses.

Still, lower employee counts, reduced construction and smaller businesses are all cutting into premiums overall, said Bob Hartwig, president of the Insurance Information Institute, an industry trade group. "The headwinds make it more difficult to generate revenue, because the economy is shrinking."

Gelb, of Barclays Capital, recommends property casualty insurers with strong management and balance sheets. His top picks are Travelers Cos. Inc. (TRV) Ace Ltd. (ACE), Arch Capital Group Ltd. (ACGL) and PartnerRe Ltd. (PRE).

-By Lavonne Kuykendall, Dow Jones Newswires; 312-750 4141; [e-mail]