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Channel Check by Kevin AmrheinPre-K Graduates

While softening rates start hitting even coastal areas, we’re nowhere close to pre-Katrina levels. Hey, if it were easy, wholesalers would have no business being there.

By Christopher Hann

If you live anywhere from Texas to North Carolina, you’d be forgiven for casting wary glances skyward this time of year. It’s the season that puts weather forecasters and property owners on high alert. Wholesale insurance brokers, too.

Wholesalers specialize in volatile markets, and there’s been little more volatile than coastal property markets in the last couple of years. Have you tried writing coverage for any aging seaside condominium complexes lately?

It’s not that they’re griping. If a risk is easy to place, wholesalers have no business being there. But as the 2007 hurricane season gets under way—and forecasters are predicting a doozy—wholesale brokers find themselves on some kind of crazy rollercoaster, even by their own standards. Nearly two years after Hurricane Katrina, capacity is returning to coastal areas, and insurance rates are starting to soften. But if you’re a commercial broker on the coast, lower prices and more capacity are relative when you’re coming off a year like 2006. And the clients? Well, they hear the property rates are softening and expect to turn the clock back to the days before revised cat models, before the rating agencies rejiggered their notion of adequate capital, back to Pre-K. If you’re writing coverage for properties with no catastrophe exposure, rates may be falling fast, but for the coast those days are still a distant memory.

From her office in West Palm Beach, Fla., Loti Woods has had a front-row seat on the shifting winds. The co-CEO and president of McAuley, Woods & Associates, Woods says the market stranglehold peaked this time last year. “It was almost impossible to put accounts together at prices that people could afford,” Woods says. “In 2006 we saw a lot of insureds going bare on their coverage, or self-insuring their entire wind program, or insuring pieces of their program. When they did buy coverage, lots of programs had gaps.”

Armand Colaninni, an executive vice president and regional manager of Napco’s Texas office, says rates on large accounts with Tier 1 exposure—referring to counties along the coast—ballooned by 300% to 400%. “The cost of some accounts went from $2 million to $12 million,” Colaninni says. Some clients were forced to take reduced limits on wind and flood as carriers cut back significantly on the capacity they would offer.

As standard carriers retreated, wholesalers came to the rescue with access to surplus lines and facilities to tap international markets. “As a rule of thumb, we are normally there to fill that void when they pull out,” says Paul Martin, a senior vice president at CRC Insurances Services, a wholesaler in Birmingham, Ala. “That’s when we’ re able to come in and compete.” But even they couldn’t fill every program.

After the devastation of 2005, carriers rebounded in 2006—which marked only the 12th time in 61 years that not a single hurricane made landfall in the United States.

Flush with a combination of new and replenished reinsurance and insurance capital—including about $18 billion in Bermuda—carriers are actually competing for coastal property accounts. One new player that leaps from everyone’s lips is Ironshore, a Bermuda insurer that started up with $1 billion in capital on Jan. 1, with a focus on property catastrophe risk. In May, the company made the short leap to the U.S., establishing its first surplus lines licenses in South Carolina and Florida.

“With more capacity comes more competition,” Colaninni says. “There’s kind of a herd mentality in this business.”

Martin says the market seemed to start softening immediately after Jan. 1, and weeks before June’s official start of hurricane season rates were moderating, in some cases dropping by as much as 20% to 25%. “At the start of year, everyone forecast the market would continue to be tight, and the reverse happened,” he says. “We saw more capacity, a reduction in prices, accounts being rewritten midterm. It just means that we’re probably seeing more opportunity now than we saw last year.”

But Woods says in certain areas of Florida, particularly the tri-county region of Dade, Brower, and Palm Beach, demand for coverage remains high, as does the cost. Likewise, insurance for older construction that is out of step with current building codes remains at the very high 2006 levels.

Brokers today have opportunities to improve programs in coastal areas, but it’s still not easy. Working with wholesalers who have a handle on fast-changing insurer appetites may be the best bet to complete a client’s catastrophe-exposed property program with better rates and terms than last year.

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