In the face of a record catastrophe season, state residual markets need to take a dose of reality and think about increasing premiums to reflect risk or face serious trouble in the future, an industry economist said.
Robert P. Hartwig, vice president and chief economist for the Insurance Information Institute in New York, said the reality of the catastrophic losses the insurance industry has experienced this year from hurricanes will mean higher rates for homeowners and commercial clients for years to come. He said strains from the losses will mean primary insurers have to increase premiums and re-examine their risk appetites in the wind-exposed regions.
Some insurers, Mr. Hartwig observed, will seek to reduce their exposure. The reluctance of new capital entering that marketplace will mean fewer primary insurers and more policyholders turning to the state residual markets for insurance.
Mr. Hartwig estimates that total hurricane losses currently stand at $55.7 billion, (a figure he called conservative)–almost double last year's record losses of $27.5 billion.
Hurricane Wilma, with estimated losses topping $10 billion, will clearly make the top 10 list, he noted.
"While insurers are not expecting to see doubling of loss increases for the next few years, they do see elevated losses for decades to come," he said. "Homeowners, commercial and reinsurance will have to be priced to reflect that elevated risk."
The current state residual system must reassess its pricing policies in the face of this new reality, he pointed out. The markets must no longer bow to political pressure to keep rates low and must raise rates to be actuarially sound. The pricing, he noted, needs to not only cover current losses but build reserves for the future.
"The states will have to raise rates more than the private insurers," Mr. Hartwig said.
Yesterday, Fitch Ratings downgraded Florida's residual market, Citizens Property Insurance Corporation, long-term issuer and senior debt ratings. The rating service lowered Citizens rating to "A-minus" from "A," with a negative outlook. However, the "triple-A" rating on its high-risk account senior secured pre-event note issues remained intact with a stable outlook.
Fitch said while the fund has ample claims-paying resources, it is concerned that the quality of the Florida insurance market, from which Citizens levies assessments to cover deficiencies, could deteriorate. It noted the loss of financially strong insurers leaving the market to small carriers and Citizens, which do not reflect the same financial strength.
A.M. Best announced yesterday that it has downgraded the financial strength ratings of Southern Farm Bureau Property Insurance Company, based in Ridgeland, Miss., and Hamilton, Bermuda-based Montpelier Reinsurance Ltd. Both companies' financial strength ratings went from "A to "A-minus."
The Oldwick, N.J.-based rating service cited losses incurred from Hurricanes Katrina and Rita for the actions.
Meanwhile, the Property Casualty Insurers Association of America, based in Des Plaines, Ill., said insurers are confident they have enough adjusters in Florida to deal with claims arising from Hurricane Wilma.
"The four storms that hit Florida within six weeks last year provided the industry with experience in responding to consecutive major hurricanes, and insurers are well prepared for this situation," PCI said.
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