Catastrophes and the Property Market

October 16, 2017

The catastrophe exposed property and habitational markets could be in for some changes following this year’s active hurricane season. Joe Morrello, head of excess and surplus (E&S) property for specialty insurer Beazley spoke to Insurance Journal at the recent Wholesale & Specialty Insurance annual meeting in San Diego about current market conditions and what to expect in a post-2017 hurricane season environment. Below are excerpts from that interview.

IJ: What is the biggest challenge in the E&S property market right now?

Joe Morrello: Right now, the greatest challenge is probably the amount of capital that is in the marketplace. That dilutes the rate, so rate right now is pretty hard to come by. A lot of the lines are underfunded.

IJ: Will this hurricane season change anything?

Morrello: It’s early to tell right now, but for a number of years, we’ve had a relatively benign cat season, and quite a few carriers … just about every carrier out there has been borrowing from Peter to pay Paul. That is basically saying where we would fund our cat losses, we are now pulling from that funding to fund our attritional losses because we are simply not seeing the rates. I would say we would have to see some change … but the realization is going to be there after the losses roll in.

IJ: The habitational market has been an area of growth. How would you describe this market?

Morello: We’re seeing our share of habitational (growth). But again, the problem with habitational right now is (rates) are so diluted that you can’t pay the attritional losses. We’re seeing a lot of risks out there that are grouping together for habitational, whereas you’re not seeing the one-offs. A lot of management companies are grouping (habitational risks) together, and by grouping together, of course, that’ll give a larger premium base. When you group a bunch of risk together that gives it a little bit of a dilution in the rating as well. … People want to be where it’s nice to live, so you’re seeing (habitational growth) in coastal properties, and you’re seeing it down south.

IJ: There’s a lot of competition in property in terms of underwriters in the coastal risk/cat-prone regions. Will that change now in light of the recent hurricane season?

Morrello: Prior to this (season), we started to see a slowdown — not a firming of the market, but a slowdown in pricing. Everybody’s starting to come to the realization, in particular with habitational, that there simply isn’t enough rate to pay attritional and cat losses. That one cat event is going to bring everybody to this conclusion, regardless. The industry as a whole recognized this prior to (the recent season); but now it’s probably going to give them that extra push to get back on track.

IJ: What concerns do underwriters have when rebuilding dwellings after a catastrophe like Hurricanes Harvey or Irma? Labor shortages and inferior building materials come to mind.

Morrello: It’s all of the above, because not only do you have scarcity of materials, you have a scarcity of qualified contractors. There’s always somebody out there who wants to make a quick buck, who’s going to scam. Even the established contractors who actually do a good job — they’re running thin. … You’re always worried about that. You’re always worried about the influx of materials that are inferior. By and large, the building segment really has addressed looking at what comes in, especially after the debacle with Chinese drywall. The products are there. They’re going to be good. … It’s just the scale is enormous. It far exceeds what the normal (building) requirement is for that segment.