Moloney: The London Market — like all others — suffered increased losses last year, increases in their reinsurance premiums, and/or a reduction in capacity. As a result, the underwriters are telling us rates must go up for them to be able to write business this year.

FL UW: How bullish are you about writing coastal Florida property?

Lassiter: “Bullish” would mean that the market terms are terrific. We do not see that to be the case. We have a limited amount of ability to assume additional exposures in Florida.

FL UW: But your company wrote considerable property premium in Florida in 2008, so is it fair to say that you still see Florida as worth the effort required to figure out how to remain a viable market for commercial property?

Lassiter: Yes.

Vaccaro: We are certainly interested in writing property business in Florida, but it cannot all be coastal risks. We'll really need to get a spread of risk. And of course we'll rely on our modeling and pricing system, which is pretty sophisticated. Wherever the risk is located, we must be disciplined and be willing to step away from accounts if the rates cannot be sustained profitably.

Moloney: As a broker, we are very bullish about obtaining increased orders in Florida this year. When the market conditions are tough, we tend to see more inquiries. If we can obtain good terms, then we stand a better chance of securing an order due to reduced competition. The only thing tempering this is a reduced capacity. Some of the underwriters in London are facing a few additional challenges due to the swing in the currency markets. Each Lloyd's syndicate is able to write a certain amount of business in any one catastrophe area. As the currency rate changes, so does the calculation for available limits. If in 2009 the exchange rate becomes less favorable to London, then the underwriters would have a new and proportionately lower maximum-available limit. As a result, the syndicate will probably have to come off business that is deemed too cheap and/or reduce capacity on a risk-by-risk basis.

FL UW: Many in the industry assume that future rates and terms will always be at the mercy of hurricane season results. So when storms are prevalent and costly, rates and terms go up, while fewer storms and less damage bring the opposite result. Is that an over-simplification?

Lassiter: I believe that is an oversimplification. We are selling coverage for future events, which are unknown. We risk capital, expecting to make a fair return. The insurance business is an economic model just like any other business. If the return is unsatisfactory, then capital is withdrawn from the market, which is what happened in 2006 after the Katrina, Rita, and Wilma hurricanes. When capital (supply) is withdrawn, demand increases, in turn driving up rates.

Vaccaro: Storm season has limited impact on how we look at Florida property. We manage to a 250-year and 500-year plan, a formula that includes a long-term look and a consistent ability to offer coverage “post event.” The capability to continue to write policies after an event is critical. If you are going to be a catastrophe writer, then you need to get a spread of business and manage the portfolio.

Moloney: As long as the laws of supply and demand exist, this will always be the case. After a year of hurricane losses, demand increases as more people want the cover at a time when supply reduces, and the price goes up. After a few loss-free years, underwriters have more capital, and supply increases, and pricing goes down. Please note that it is not only hurricanes that can affect Florida pricing. A large earthquake or flood elsewhere would also have an effect, as insurance capacity would shrink. Equally, pricing and capacity availability could be affected by the failure of any large multi-national, multi-lines insurer heavily involved in wind-prone states.

FL UW: Are we too myopic here in Florida? Does Florida “stand alone” when determining rates because of the tremendous values at risk and premiums to be gained compared to other gulf coast states?

Lassiter: We look at our storm tracks and the accumulations across multiple landfalls. However, many storms impact Florida; a much smaller percent impact other gulf coast states. This means that the models project that Florida is more exposed, resulting in higher rates for the exposures we assume.

Vaccaro: Companies that really understand cat exposures and return-on-investment have to underwrite on a portfolio basis. For our purposes we use a hurricane portfolio and one for earthquake, and then we combine them. We look at Florida as the hurricane PMLs [probable maximum loss] that drive our hurricane portfolio, as values and limits are great in Florida. Having said that, I think people underestimate or minimize Texas; there could have been huge potential losses if Ike had hit Houston. But Florida is still the main driver.

Moloney: London underwriters will look at all areas of their business. Florida will always be toward the top of the list due to the exposure and concentration of values. Other areas in the U.S. will also feature prominently in underwriters' business plans, such as California, Houston, the Carolinas, and New York City. London underwriters also see business on a worldwide basis, so other factors such as a Japanese earthquake will have a bearing on business plans.