After the Storm
<table cellspacing=0 cellpadding=0 border=0><tr><td align=right>Copyright: </td><td>(c) 2011 A.M. Best Company</td></tr><tr><td align=right>Source: </td><td>Proquest LLC</td></tr><tr><td align=right>Wordcount: </td><td>2096</td></tr></table><!-- start_body --><br><p>While the standard market suffered a massive blow from recent U.S. tornadoes and storms, how did excess and surplus line carriers weather them?</p><p>Experts already have deemed this one of the busiest tornado seasons after some 1,655 twisters hit <location value="LC/us" idsrc="xmltag.org">the United States</location> during the first seven months of 2011.</p><p>The insurance industry suffered a powerful blow from the destructive storms. As of June, global reinsurance intermediary <person>Aon Benfield</person> put estimated severe weather insured losses at <money>$16.84 billion</money> since January. The year is already 330% above the 1990-2010 annual average of <money>$5.11 billion</money>, the company reports.</p><p>The excess and surplus lines market also fell victim to the storms with "some losses in the market and several E&S companies suffering some fairly large losses," said <person>Gary Micetich</person>, senior vice president and special property division manager for <org>Maxum Specialty Insurance Group</org>.</p><p>Overall, however, E&S writers seemed to weather the storms better than the general market, he noted.</p><p>"That's because we don't have a lot of homeowners concentrated areas," said <person value="APIN:3591549553">Chris Timm</person>, president of <org>Century Insurance Group</org>, a subsidiary of <org value="NYSE:MIG" idsrc="xmltag.org">Meadowbrook Insurance</org> "The difference between the of properties we write comto those written by the ständard market is the age, condition or complexity of the structures. Therewe tend to not have large numof individual policies exposed typical thunderstorm and tornado events."</p><p>Despite remaining more "there are definitely some changes coming to the E&S as a result of the recent storms," said <person>Kevin Westrope</person>, president and chief executive of <location value="LU/us.mo.kancty" idsrc="xmltag.org">Kansas City, Mo.</location> -based commercial wholesale insurance broker Westrope.</p><p>"Certainly we'll see some changes on the property side, particularly if there are any more major catastrophic events in the U.S.," he said.</p><p>"So far, the magnitude of the storms is significantly higher than what the industry is accustomed to seeing in a normal year," noted <person value="APIN:3751641900">Michael Miller</person>, president of <org value="ACORN:1616892028" idsrc="xmltag.org">Scottsdale Insurance Co.</org>, a subsidiary of <org value="ACORN:4270235632" idsrc="xmltag.org">Nationwide Mutual Insurance Co.</org></p><p>The last time the E&S market suffered a powerful blow was in 2005 when Hurricane Katrina struck the southern <location value="LC/us" idsrc="xmltag.org">United States</location>. The result was some rate growth across the market, he said.</p><p>"There is now pressure on some companies to deal with the volume of claims and the impact on the overall market," Miller said. "Will it begin to firm out some pricing on the property side? I think it probably will. The magnitude, however, isn't yet known."</p><p>Added Timm, "Some of the properties the E&S market writes are more easily damaged. Also, this is a function of the marketplace in general being a bit soft. So we have granted replacement cost coverage on several older structures that we might not have considered in a harder market."</p><p>Allied lines were especially hard-hit during the storms, he said. "That's where all your weatherrelated claims are. But that has always been a challenge for us from a loss ratio standpoint. We will have an elevated loss ratio, but it's not an end-of-the-world issue or a significant spike. Property for surplus lines, in general, has been challenging over the past few years; this just didn't make it any easier."</p><p>Business interruption also took a hit,Westrope added.</p><p>"While prominent losses were in the personal lines area, there were some sizable commercial losses like school districts, stores and the hospital in <location value="LU/us.mo.joplin" idsrc="xmltag.org">Joplin</location>."</p><p>Miller also expects yearly financial results to be negatively impacted by the storms.</p><p>"That will cause companies to think about their pricing structures and question whether there's a need to increase rates."</p><p><org value="ACORN:879856307" idsrc="xmltag.org">A.M. Best's</org> Vice President of Property/Casualty Ratings, <person value="APIN:3598758892">Daniel Ryan</person>, said "it's highly unlikely" that the weather-related events of the second quarter will have a material effect on pricing in the E&S market.</p><p>"While pricing adjustments will need to be evaluated, the effects from an up-pricing will be incremental on the overall E&S marketplace ,"he added.</p><p>But Miller believes "across the entire insurance industry, this higher level of storm activity" will cause some companies to question if they're at adequate rate levels.</p><p>"Fm hearing they are already starting to question that and think they will come to the conclusion that they are probably not adequate for this level of activity," he said.</p><p>"As we go through the year we'll see some upward pressure on property rates - both personal and commercial lines. But that likely won't be huge."</p><p>As for new business opportunities in the E&S market, Ryan said, "For the most part, it will more than likely be the standard market players and the globally battered reinsurers that will dictate pricing changes. On the whole, I don't think anyone is going to overreact, but property rates will rise in certain geographies."</p><p>Added Westrope, "There will be a definite hardening of the market on property lines. Whether or not that carries over to the casualty side is difficult to say." He said much capacity and overcapacity remain in the market. "Until some of that bleeds off, I think we will just bump along and may see some hardening in some lines but not in others."</p><p>Model changes may also impact E&S rates, Micetich said.</p><p>"While a single event doesn't impact rates, there is cumulative trauma with last year's flooding and this year's spring storms. Another catalyst really pushing the E&S market toward rates firming is model changes. RMS version 11.0 is having a huge impact. Portfolio managers are trying to see how to adopt and implement the model change. However, that's driving up [probable maximum losses] and aggregates. At the end of the day, there's only one fix to that: more rate and margin. So that will have to eventually happen."</p><p>Recent events are beginning to move a few coverages into or out of the E&S market due to the storms, said Westrope. "That's especially true where accounts might have been on the edge or had just a little more cat exposure, like in the <location>Gulf Coast</location> states."</p><p>"If you look just at our experience and what we would have expected to have as far as catastrophic loses for the first five months of the year, we are probably double where we normally are," said Miller. "But that's not catastrophic in and of itself because we don't have much concentration of risks. The bigger events for us typically are during hurricane season. That just means as we look at the next several months and the amount of expected losses in our operating plan, we have less left for the remainder of the year. So if the rest of the year is calmer than normal, we would come out about where we normally expect. But if it's more active than normal, it just adds on top of an unusual start during the first few months."</p><p>That's a possibility. <org value="ACORN:3255647161" idsrc="xmltag.org">AccuWeather</org> .com meteorologists predict four direct hits on <location value="LC/us" idsrc="xmltag.org">the United States</location> by tropical systems this year.</p><p>"Every underwriter in the world will tell you the probability of us getting through 201 1 without major hurricane activity making landfall is ridiculously low," noted Micetich."But even without, model changes will dry up some capacity and force some repricing and repositioning in the market."</p><p><org>Storm Shelter</org></p><p>How are E&S writers responding to the storms?</p><p>"Right now everyone is focused on taking care of claims, getting companies back into business and trying to repair damage to facilities," Miller said. "The fallout will play out over the next several months as we face the hurricane season, where we have the potential to have additional weather losses on top of what we have experienced so far in 2011 ."</p><p>For <org value="Karachi:CENI" idsrc="xmltag.org">Century Insurance</org>, "We actually see this as an opportunity for us to shine," Timm said.</p><p>"Claims are good; if we didn't have them then we wouldn't have an industry. We just have to plan appropriately for them," he said. "Storms are sensational as to where they hit. But since we don't have major concentrations of risks anywhere, like homeowners' writers and the standard market did, we didn't get hurt as badly."</p><p>E&S writers now are focused on recent changes to the Risk Management Solutions model, said Timm. "We run both the RMS and the AIR models and tend to take averages between the two to try to recognize exactly what is and isn't applicable to our book. Then we can plan for it. We've always fallen well within the parameters of our assumptions in the event something happens. This year is not significantly alarming or different for us."</p><p>In February, RMS released its version 11.0 U.S. Hurricane Model, which is driven by significant new hazard and loss data as well as advances in research and technology since the models were last updated.</p><p><org value="Karachi:CENI" idsrc="xmltag.org">Century Insurance's</org> "highly sophisticated data management mapping capabilities" allow it to access damage potential, said Timm.</p><p>"Quickly, we get close on what our maximum exposure is. It's not as bad as what we saw with hurricanes Ivan and Katrina, and for us at this point it isn't as bad as the tornadoes we experienced in 2008. But that could just be the luck of the draw."</p><p>As for standard carriers, "we're not seeing the discipline we hear them talking about," Westrope said. "That impacts the E&S market because we're an overflow market and are impacted when they start to retract and back away from classes of business and/or accounts that may be marginal and should be on the E&S side."</p><p>Only time will tell the future for the E&S market as a result of the recent storms, he said.</p><p>Clear Skies Ahead?</p><p>Timm sees "what's happening in the E&S market" as more marketdriven than weather-driven.</p><p>"It's possible that older structures will have the standard market tightening up some of its construction, age and maintenance requirements on some of their buildings. And they'll throw more of that to the E&S market as their engineers and technical folks look at the performance of structures in the storms. If they didn't perform as they thought they would, I think more of that business would return to the E&S market, where we have freedom of rate and form."</p><p>Added Miller, "The E&S industry seems to be bottoming out from the economy and facing a downward move in rates, so we'll eventually see a plateau."</p><p>"So far, the magnitude of the storms is significantly higher than what the industry is accustomed to seeing in a normal year,"</p><p>- <person value="APIN:3751641900">Michael Miller</person>,</p><p><org value="ACORN:1616892028" idsrc="xmltag.org">Scottsdale Insurance Co.</org></p><p>CRUSHED BY THE WIND: A van belonging to <org>St. John's Regional Medical Center</org> lies in ruins several blocks from the hospital (background) where it was parked in <location value="LU/us.mo.joplin" idsrc="xmltag.org">Joplin, Mo.</location> An EF-5 tornado tore through much of the city <chron>May 22</chron>, damaging the hospital and hundreds of homes and businesses and killing at least 160 people. (AP Photo/<person>Charlie Riedel</person>)</p><p><person>Key Points</person></p><p>* What's Happening: The excess and surplus market suffered some losses from recent U.S. storms.</p><p>* Current Trend: Allied lines and business interruption were two business classes impacted by the weather-related events.</p><p>* What's <person>To Come</person>: E&S writers are keeping a close watch on how the current hurricane season will affect the market.</p><p>"Another catalyst really pushing the E&S market toward rates firming is model changes ... RMS version 1 1.0 is having a huge impact."</p><p>- <person>Gary Micetich</person>,</p><p><org>Maxum Specialty Insurance Group</org></p><p>E&S writers remained more unscathed than standard carriers "because we don't have a lot of homeowners concentrated in areas"</p><p>- <person value="APIN:3591549553">Chris Timm</person>,</p><p><org>Century Insurance Group</org></p><p>Storm Center</p><p>A closer look at some tornado facts and figures from 201 1 U.S. storms.</p><p>* April 201 1 is ranked as the most active tornado month on record with 875 tornadoes.</p><p>* The overall yearly average number of tornadoes for the past decade is 1 ,274.</p><p>* Preliminary estimates say there have been about 1 ,655 tornadoes in 201 1 , as of <chron>July 20</chron>. The yearly record for number of tornadoes was set in 2004 with 1,814.</p><p>* The EF-5 tornado that hit <location value="LU/us.mo.joplin" idsrc="xmltag.org">Joplin, Mo.</location> on <chron>May 22</chron> had winds in excess of 200 mph and was three-quarters of a mile wide.</p><p>* The state of <location value="LS/us.ks" idsrc="xmltag.org">Kansas</location> set a single-month record in April with nearly <money>$503 million</money> in insured storm losses.</p><p>* May is historically the most active month for tornadoes. More than 370 tornadoes occurred in <chron>May 2011</chron>.</p><p>Sources: <org>National Oceanic and Atmospheric Administration</org>; Impact Forecasting</p><p>Learn More</p><p><org>Maxum Specialty Insurance Group</org></p><p><org value="ACORN:879856307" idsrc="xmltag.org">A.M. Best Company</org> #18653</p><p>Distribution: Wholesale brokers and general agents</p><p><org value="NYSE:MIG" idsrc="xmltag.org">Meadowbrook Insurance Group</org></p><p><org value="ACORN:879856307" idsrc="xmltag.org">A.M. Best Company</org> # 018132</p><p>Distribution: Independent agencies, wholesalers, general underwriters, trade associations</p><p><org value="ACORN:1616892028" idsrc="xmltag.org">Scottsdale Insurance Co.</org></p><p>A. <org>M. Best Company</org> # 002358 (parent: <org value="ACORN:4270235632" idsrc="xmltag.org">Nationwide Mutual Insurance Co.</org>)</p><p>Distribution: Exclusive and independent agents, direct, direct marketing to affinity groups</p><p>For ratings and other financial strength information visit <a href="http://www.ambest.com">www.ambest.com</a>.</p>
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